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EX-5.1 - Emmaus Life Sciences, Inc. | v172669_ex5-1.htm |
EX-23.1 - Emmaus Life Sciences, Inc. | v172669_ex23-1.htm |
As filed with the Securities and Exchange
Commission on January 29,
2010
|
Registration No.
__________
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES
ACT OF 1933
CNS
RESPONSE, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
8734
|
87-0419387
|
(State
or other jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S
Employer
|
incorporation
or organization)
|
Classification
Code Number)
|
Identification
No.)
|
85
Enterprise, Suite 410
Aliso
Viejo, CA 92656
(714) 545-3288
(Address,
including Zip Code, and Telephone Number, including Area Code, of Registrant’s
Principal Executive Offices)
George
Carpenter, Chief Executive Officer
CNS
Response, Inc.
85
Enterprise, Suite 410
Aliso
Viejo, CA 92656
(714) 545-3288
Copy
to:
Scott
Alderton, Esq.
Stubbs
Alderton & Markiles, LLP
15260
Ventura Boulevard, 20th
Floor
Sherman
Oaks, California 91403
(818)
444-4500
(Name,
Address, including Zip Code, and Telephone Number, including Area Code, of Agent
for Service)
Approximate
date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company þ
|
(Do
not check if a smaller reporting company)
|
CALCULATION OF REGISTRATION
FEE
|
Title of Each Class
of Securities
To Be Registered
|
Amount To Be
Registered (1)
|
Proposed
Maximum
Offering Price
Per Unit (2)
|
Proposed
Maximum
Aggregate
Offering Price (2)
|
Amount
Of
Registration
Fee (3)
|
||||||||||||
Common
Stock, par value $.001 per share
|
44,595,438 | $ | 0.52 | $ | 23,189,627.76 | $ | 1,653.42 | |||||||||
Common
Stock, par value $.001 per share issuable upon exercise of
warrants
|
20,722,098 | $ | 0.52 | $ | 10,775,490.96 | $ | 768.29 | |||||||||
TOTAL
|
65,317,536 | $ | 33,965,118.72 | $ | 2,421.71 |
(1)
|
In
the event of a stock split, stock dividend, or other similar transaction
involving the Registrant’s common stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a) under the Securities
Act.
|
(2)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, using the average of the
high and low price as reported on the Over-the-Counter Bulletin Board on
January 27, 2010.
|
REGISTRANT
HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),MAY
DETERMINE.
Subject
to Completion, Dated January 29, 2010
CNS
RESPONSE, INC.
65,317,536 Shares Common
Stock
This
prospectus relates to the offer and sale from time to time of up to 65,317,536
shares of our common stock that are held by the stockholders named in the
“Selling Stockholders” section of this prospectus. The prices at
which the selling stockholders may sell the shares in this offering will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale
of the shares. We will bear all expenses of registration incurred in connection
with this offering. The selling stockholders whose shares are being registered
will bear all selling and other expenses.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the symbol
“CNSO.OB.” On January 27, 2010,
the last reported sales price of the common stock on the Over-The-Counter
Bulletin Board was $0.52 per share.
Investing
in our common stock involves risks. See “Risk Factors” beginning on
page 4.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date
of this prospectus is ______________
TABLE
OF CONTENTS
Page
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Page
|
|||||
Prospectus
Summary
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1
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Executive
Compensation
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57
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|||
Risk
Factors
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4
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Principal
and Selling Stockholders
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65
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|||
Cautionary
Note Regarding Forward-
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|
Related
Party Transactions
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75
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|||
looking
Statements
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20 |
Description
of Capital Stock
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80 | |||
Use
of Proceeds
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21
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Plan
of Distribution
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84
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|||
Legal
Matters
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86 | |||||
Market
for Common Equity and
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Experts
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86
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||||
Related
Stockholder Matters
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21
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Where
You Can Find
|
||||
Management’s
Discussion and
|
More
Information
|
86
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||||
Analysis
of Financial Condition
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Index
to Financial
|
|||||
and
Results of Operations
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22
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Statements
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87
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|||
Business
|
35
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|||||
Management
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53
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You
should rely only on the information contained in this prospectus or any
supplement. We have not authorized anyone to provide information that
is different from that contained in this prospectus. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of our
common stock.
Except as
otherwise indicated, information in this prospectus reflects a one-for-fifty
reverse stock split of our common stock which took effect on January 10,
2007.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained in greater detail
elsewhere in this prospectus. This summary does not contain all the
information you should consider before investing in our common stock. You
should read the entire prospectus carefully before making an investment
decision, including “Risk Factors” and the consolidated financial
statements and the related notes. References in this prospectus
to “CNS Response, Inc.,” the “company,” “we,” “our” and “us” refer to CNS
Response, Inc. and our consolidated subsidiaries.
Our
History
CNS
Response, Inc. was incorporated in Delaware on July 10, 1984, under the
name Mammon Oil & Gas, Inc. Prior to January 16, 2007, CNS
Response, Inc. (then called Strativation, Inc.) existed as a “shell
company” with nominal assets whose sole business was to identify, evaluate
and investigate various companies to acquire or with which to
merge. On March 7, 2007, we acquired CNS Response, Inc., a
California corporation (“CNS California”) through a merger of CNS
California with a wholly-owned subsidiary that we formed for the purpose
of facilitating this transaction. Upon the closing of this
merger transaction, CNS California became our wholly-owned subsidiary, and
we changed our name from Strativation, Inc. to CNS Response,
Inc.
Our
Business
Overview
We
are a life sciences company with two distinct business segments. Our
Laboratory Information Services business operated by CNS California, which
we consider our primary business, is focused on the commercialization of a
patented system that guides psychiatrists and other physicians to
determine a proper treatment for patients with behavioral (psychiatric
and/or addictive) disorders. Our Clinical Services business
operated by our wholly-owned subsidiary, Neuro-Therapy Clinic, Inc.
("NTC"), is a full service psychiatric clinic. The address of
our principal executive office is 85
Enterprise, Suite 410, Aliso Viejo,
CA 92656, and our telephone number is (714) 545-3288.
Laboratory
Information Services
In
connection with our Laboratory Information Services business, we have
developed an extensive proprietary database (the “CNS Database”)
consisting of over 17,000 clinical outcomes across more than 2,000
patients who had psychiatric or addictive problems. For each patient, we
have compiled electrocephalographic (“EEG”) data, symptoms and outcomes,
often across multiple treatments from multiple psychiatrists and
physicians. Using this database, our technology compares a patient’s
EEG to the outcomes in the database and ranks treatment options
based on treatment success of patients having similar
neurophysiology.
Trademarked
as Referenced-EEG ®
(“rEEG”), this patented technology allows us to create and provide simple
reports (“rEEG Reports”) that specifically guide physicians to treatment
strategies based on the patient’s own physiology. The vast majority of
these patients were considered long-term “treatment-resistant”, the most
challenging, high-risk and expensive category to treat.
rEEG
identifies relevant neurophysiology that is variant from the norm and
identifies medications that have successfully treated database patients
having similar aberrant physiology. It does this by comparing a
patient’s standard digital EEG to an external normative database, which
identifies the presence of abnormalities. The rEEG process then identifies
a set of patients having similar abnormalities as recorded in our CNS
Database and reports on historical relative medication success for this
stratified group. Upon completion, the physician is provided the analysis
in a report detailing and ranking classes of agents (and specific agents
within the class) by treatment success for patients having similar
abnormal electrophysiology.
|
1
Our
business is focused on increasing the demand for our rEEG
services. We believe the key factors that will drive broader
adoption of our rEEG services will be acceptance by healthcare providers
of their clinical benefits, demonstration of the cost-effectiveness of
using our test, reimbursement by third-party payers, expansion of our
sales force and increased marketing efforts.
Clinical
Services
In
January 2008, we acquired our largest customer, the Neuro-Therapy Clinic,
Inc. Upon the completion of the transaction, NTC became a
wholly-owned subsidiary of ours. NTC operates one of the largest
psychiatric medication management practices in the state of Colorado,
with five full time and six part time employees including
psychiatrists and clinical nurse specialists with prescribing
privileges. Daniel A. Hoffman, M.D. is the medical director at
NTC, and, after the acquisition, became our Chief Medical Officer and more
recently, our President.
NTC,
having performed a significant number of rEEG’s, serves an important
resource in our product development, the expansion of our CNS Database,
production system development and implementation, along with the
integration of our rEEG services into a medical
practice. Through NTC, we also expect to successfully develop
marketing and patient acquisition strategies for our Laboratory
Information Services business. Specifically, NTC is learning how to best
communicate the advantages of rEEG to patients and referring physicians in
the local market. We will share this knowledge and developed
communication programs learned through NTC with other physicians using our
services, which we believe will help drive market acceptance of our
services. In addition, we plan to use NTC to train
practitioners across the country in the uses of our rEEG
technology.
We
view our Clinical Services business as secondary to our Laboratory
Information Services business, and we have no current plans to expand this
business.
Financial
Information
Since
our inception, we have generated significant net losses. As of September
30, 2009, we had an accumulated deficit of $25.2 million. We incurred
operating losses of $8.5 million and $5.4 million for the fiscal years
ended September 30, 2009 and 2008, respectively. We have not
yet achieved profitability and anticipate that we will continue to incur
net losses for at least the next year. We anticipate that a substantial
portion of our capital resources and efforts will be focused on research
and development, scale up of our commercial organization, and other
general corporate purposes, including the payment of legal fees associated
with our litigation with Leonard Brandt, our former Chief Executive
Officer and a former director of the company. Research and
development projects include the completion of more clinical trials which
are necessary to further validate the efficacy of our products and
services relating to our rEEG technology across different type of
behavioral disorders, the enhancement of the CNS Database and, to a lesser
extent, the identification of new medication that are often combinations
of approved drugs. As of September 30, 2009 we had
approximately $0.99 million in cash and cash equivalents and a working
capital deficit of approximately $1.1 million compared to approximately
$2.0 million in cash and cash equivalents and a working capital balance of
approximately $0.83 million at September 30, 2008. Upon the
closing of the second, third and fourth tranches of our private placement
on December 24, 2009, December 31, 2009 and January 4, 2010, we raised a
further $3,130,400 net of closing costs.
|
2
The
Offering
|
|||
Common
stock offered
|
Up
65,317,536 shares by the selling stockholders
|
||
Common
stock outstanding before this offering
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53,567,795
|
||
Common
stock to be outstanding after this offering
|
Up
to 74,289,893 shares
|
||
Use
of proceeds
|
We
will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders. See “Use of
Proceeds.”
|
||
Over-the-Counter
Bulletin Board symbol
|
CNSO.OB
|
||
Risk
Factors
|
See
“Risk Factors” beginning on page 4 for a discussion of factors that you
should consider carefully before deciding to purchase our common
stock.
|
||
In
the table above, the number of shares to be outstanding after this
offering is based on 53,567,795 shares outstanding as of January 27, 2010, and assumes the issuance
to the selling stockholders of the following additional shares which are
being offered for sale under the prospectus:
|
|||
●
|
20,722,098 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $0.52 per share. | ||
In
the table above, the number of shares to be outstanding after this
offering does not reflect the issuance of the following shares, which are
not being offered for sale under this prospectus:
|
|||
●
|
29,293,100
shares of common stock reserved for issuance upon exercise of warrants and
options, as of January 27,
2010.
|
||
3
RISK
FACTORS
Investing
in CNS Response, Inc. involves a high degree of risk. You should carefully
consider the following risk factors and all other information contained in this
prospectus before purchasing our common stock. The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties that we are unaware of, or that we currently deem immaterial, also
may become important factors that affect us. If any of the following risks
occur, our business, financial condition or results of operations could be
materially and adversely affected. In that case, the trading price of our common
stock could decline, and you may lose some or all of your
investment.
Risks
Related to Our Company
Our
core Laboratory Information Services business has a limited operating history,
making it difficult to evaluate our future performance.
Our
operating subsidiary which conducts our core Laboratory Information Services
business, CNS Response, Inc., a corporation formed under the law of the State of
California (“CNS California”), was incorporated in 2000 and therefore has a
limited operating history. Investors therefore have limited
substantive financial information relating to our core business to evaluate an
investment in our company. Our potential must be viewed in light of the
problems, expenses, difficulties, delays and complications often encountered in
the operation of a new business. We will be subject to the risks inherent in the
ownership and operation of a company with a limited operating history such as
fluctuations in expenses, competition, the general strength of regional and
national economies, and governmental regulation. Any failure to successfully
address these risks and uncertainties could seriously harm our business and
prospects.
If
our rEEG reports do not gain widespread market acceptance, then our revenues may
not exceed our expenses.
We have
developed a methodology that aids psychiatrists and other physicians in
selecting appropriate and effective medications for patients with certain
behavioral or addictive disorders based on physiological traits of the patient’s
brain and information contained in a proprietary database that has been
developed over the last twenty years. We began selling reports,
referred to as rEEG Reports,
based on our methodology in 2000. To date, we have not received
widespread market acceptance of the usefulness of our rEEG Reports in helping
psychiatrists and physicians inform their treatment strategies for patients
suffering from behavioral and/or addictive disorders. If we fail to
achieve widespread market acceptance for our rEEG Reports, we will not be able
to grow our revenues, which could negatively impact our stock
price.
Our
Clinical Services Business generates the majority of our revenue, and adverse
developments in this business could negatively impact our operating
results.
Our Clinical Services business, which we view as
ancillary to our core Laboratory Information Services business, currently
generates the majority of our revenue. In the event that NTC is
unable to sustain the current demand for its services because, for instance, the
company is unable to maintain favorable and continuing relations with its
clients and referring psychiatrists and physicians or Daniel Hoffman, the
Medical Director at NTC and our Chief Medical Officer and President, is no
longer associated with NTC, our revenues could significantly decline, which
could adversely impact our operating results and our ability to implement our
growth strategy.
4
Our
operating results may fluctuate significantly and our stock price could decline
or fluctuate if our results do not meet the expectation of analysts or
investors.
Management
expects that we will experience substantial variations in our operating results
from quarter to quarter. We believe that the factors which influence this
variability of quarterly results include:
|
·
|
the
use of and demand for rEEG Reports and other products and/or services that
we may offer in the future that are based on our patented
methodology;
|
|
·
|
the
effectiveness of new marketing and sales
programs;
|
|
·
|
turnover
among our employees;
|
|
·
|
changes
in management;
|
|
·
|
the
introduction of products or services that are viewed in the marketplace as
substitutes for the services we
provide;
|
|
·
|
communications
published by industry organizations or other professional entities in the
psychiatric and physician community that are unfavorable to our
business;
|
|
·
|
the
introduction of regulations which impose additional costs on or impede our
business; and
|
|
·
|
the
timing and amount of our expenses, particularly expenses associated with
the marketing and promotion of our services, the training of physicians
and psychiatrists in the use of our rEEG Reports, and research and
development.
|
As a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is possible
that in some future quarter or quarters, our operating results will be below the
expectations of securities analysts or investors. In that case, our common stock
price could fluctuate significantly or decline.
We
have a history of operating losses.
We are a
company with a limited operating history. Since our inception, we have incurred
significant operating losses. As of September 30, 2009, our accumulated deficit
was approximately $25 million. Our future capital requirements will depend on
many factors, such as the risk factors described in this section, including our
ability to maintain our existing cost structure and to execute our business and
strategic plans as currently conceived. Even if we achieve
profitability, we may be unable to maintain or increase profitability on a
quarterly or annual basis.
We
will need additional funding to support our operations and capital expenditures,
which may not be available to us and which lack of availability could adversely
affect our business.
We have
not generated significant revenues or become profitable, may never do so, and
may not generate sufficient working capital to cover costs of
operations. We intend to fund our operations and capital expenditures
from revenues, our cash on hand, from the proceeds of future financings and
potentially from strategic collaborations. As of September 30, 2009, we had
approximately $0.99 million in cash and cash equivalents at hand. On
December 24, 2009, December 31, 2009 and January 4, 2010 we closed on the
second, third and fourth tranches of our Private Placement in which we raised
net proceeds of $3,130,400. We plan to use these funds to pay-off
debt and provide working capital for our operations. Despite the
completion of this financing, we believe that it will be necessary to raise
additional funds in 2010.
5
The
amount of capital we will need to conduct our operations and the time at which
we will require such capital may vary significantly depending upon a number of
factors, such as:
|
·
|
the
amount and timing of costs we incur in connection with our research and
product development activities, including enhancements to our CNS Database
and costs we incur to further validate the efficacy of our rEEG
technology;
|
|
·
|
the
amount and timing of costs we incur in connection with the expansion of
our commercial operations, including our selling and marketing
efforts;
|
|
·
|
whether
we incur significant additional legal fees in our litigation with Brandt
in relation to his pending counterclaims in the United States District
Court or his appeals pending with the Supreme Court of the State of
Delaware;
|
|
·
|
revenues
we generate from the sale of our services;
and
|
|
·
|
if
we expand our business by acquiring or investing in complimentary
businesses.
|
We do not
know whether additional funding will be available on acceptable terms, or at
all, especially given the economic conditions that currently
prevail. In addition, any additional funding may result in
significant dilution to existing stockholders. If we are not able to
secure additional funding when needed, we may have to delay, reduce the scope of
or eliminate one or more research and development programs or selling and
marketing initiatives, and implement other cost saving measures. Any
of these actions could substantially harm our business.
Our
industry is highly competitive, and we may not be able to compete successfully,
which could result in price reductions and decreased demand for our
products.
The
healthcare business in general, and the behavioral health treatment business in
particular, are highly competitive. In the event that we are unable to convince
physicians, psychiatrists and patients of the efficacy of our products and
services, individuals seeking treatment for behavioral health disorders may seek
alternative treatment methods, which could negatively impact our sales and
profitability.
Our
rEEG Reports may not be as effective as we believe them to be, which could limit
or prevent us from growing our revenues.
Our
belief in the efficacy of our rEEG technology is based on a limited number of
studies. Such results may not be statistically significant, and may
not be indicative of the long-term future efficacy of the information we
provide. Controlled scientific studies, including those that have been announced
and that are planned for the future, may yield results that are unfavorable or
demonstrate that our services, including our rEEG Reports, are not clinically
useful. While we have not experienced such problems to date, if the initially
indicated results cannot be successfully replicated or maintained over time,
utilization of services based on our rEEG technology, including the delivery of
our rEEG Reports, may not increase as we anticipate, which would harm our
operating results and stock price. In addition, if we fail to upgrade
our CNS Database to account for new medications that are now available on the
market, psychiatrists and other physicians may be less inclined to utilize our
services if they believe that our reports only provide information about older
treatment options, which would further harm our operating results and stock
price.
6
If
we do not maintain and expand our relationships in the psychiatric and physician
community, our growth will be limited and our business could be
harmed. If psychiatrists and other physicians do not recommend and
endorse our products and services, we may be unable to increase our sales, and
in such instances our profitability would be harmed.
Our
relationships with psychiatrists and physicians are critical to the growth of
our Laboratory Information Services business. We believe that these
relationships are based on the quality and ease of use of our rEEG Reports, our
commitment to the behavioral health market, our marketing efforts, and our
presence at tradeshows. Any actual or perceived diminution in our
reputation or the quality of our rEEG Reports, or our failure or inability to
maintain our commitment to the behavioral health market and our other marketing
and product promotion efforts could damage our current relationships, or prevent
us from forming new relationships, with psychiatrists and other physicians and
cause our growth to be limited and our business to be harmed.
To sell
our rEEG Reports, psychiatric professionals must recommend and endorse
them. We may not obtain the necessary recommendations or endorsements
from this community. Acceptance of our rEEG Reports depends on educating
psychiatrists and physicians as to the benefits, clinical efficacy, ease of use,
revenue opportunity, and cost-effectiveness of our rEEG Reports and on training
the medical community to properly understand and utilize our rEEG
Reports. If we are not successful in obtaining the recommendations or
endorsements of psychiatrists and other physicians for our rEEG Reports, we may
be unable to increase our sales and profitability.
Negative
publicity or unfavorable media coverage could damage our reputation and harm our
operations.
In the
event that the marketplace perceives our rEEG Reports as not offering the
benefits which we believe they offer, we may receive significant negative
publicity. This publicity may result in litigation and increased
regulation and governmental review. If we were to receive such
negative publicity or unfavorable media attention, whether warranted or
unwarranted, our ability to market our rEEG Reports would be adversely affected,
pharmaceutical companies may be reluctant to pursue strategic initiatives with
us relating to the development of new products and services based on our rEEG
technology, we may be required to change our products and services and become
subject to increased regulatory burdens, and we may be required to pay large
judgments or fines and incur significant legal expenses. Any
combination of these factors could further increase our cost of doing business
and adversely affect our financial position, results of operations and cash
flows.
If
we do not successfully generate additional products and services from our
patented methodology and proprietary database, or if such products and services
are developed but not successfully commercialized, then we could lose revenue
opportunities.
Our
primary business is the sale of rEEG Reports to psychiatrists and physicians
based on our rEEG methodology and proprietary database. In the
future, we may utilize our patented methodology and proprietary database to
produce pharmaceutical advancements and developments. For instance,
we may use our patented methodology and proprietary database to identify new
medications that are promising in the treatment of behavioral health disorders,
identify new uses of medications which have been previously approved, and
identify new patient populations that are responsive to medications in clinical
trials that have previously failed to show efficacy in United States Food &
Drug Administration (FDA) approved clinical trials. The development
of new pharmaceutical applications that are based on our patented methodology
and proprietary database will be costly, since we will be subject to additional
regulations, including the need to conduct expensive and time consuming clinical
trials.
7
In
addition, to successfully monetize our pharmaceutical opportunity, we will need
to enter into strategic alliances with biotechnology or pharmaceutical companies
that have the ability to bring to market a medication, an ability which we
currently do not have. We maintain no pharmaceutical manufacturing,
marketing or sales organization, nor do we plan to build one in the foreseeable
future. Therefore, we are reliant upon approaching and successfully
negotiating attractive terms with a partner who has these
capabilities. No guarantee can be made that we can do this on
attractive terms. If we are unable to find strategic partners for our
pharmaceutical opportunity, our revenues may not grow as quickly as we desire,
which could lower our stock price.
In
the event that we pursue our pharmaceutical opportunities, we or any development
partners that we partner with will likely need to conduct clinical
trials. If such clinical trials are delayed or unsuccessful, it could
have an adverse effect on our business.
We have
no experience conducting clinical trials of psychiatric medications and in the
event we conduct clinical trials, we will rely on outside parties, including
academic investigators, outside consultants and contract research organizations
to conduct these trials on our behalf. We will rely on these parties
to assist in the recruitment of sites for participation in clinical trials, to
maintain positive relations with these sites, and to ensure that these sites
conduct the trials in accordance with the protocol and our
instructions. If these parties renege on their obligations to us, our
clinical trials may be delayed or unsuccessful.
In
the event we conduct clinical trials, we cannot predict whether we will
encounter problems that will cause us or regulatory authorities to delay or
suspend our clinical trials or delay the analysis of data from our completed or
ongoing clinical trials. In addition, we cannot assure you that we will be
successful in reaching the endpoints in these trials, or if we do, that the FDA
or other regulatory agencies will accept the results.
Any of
the following could delay the completion of clinical trials, or result in a
failure of these trials to support our business, which would have an adverse
effect on our business:
|
·
|
delays
or the inability to obtain required approvals from institutional review
boards or other governing entities at clinical sites selected for
participation in our clinical
trials;
|
|
·
|
delays
in enrolling patients and volunteers into clinical
trials;
|
|
·
|
lower
than anticipated retention rates of patients and volunteers in clinical
trials;
|
|
·
|
negative
results from clinical trials for any of our potential products;
and
|
|
·
|
failure
of our clinical trials to demonstrate the efficacy or clinical utility of
our potential products.
|
If we
determine that the costs associated with attaining regulatory approval of a
product exceed the potential financial benefits or if the projected development
timeline is inconsistent with our determination of when we need to get the
product to market, we may chose to stop a clinical trial and/or development of a
product.
If
we do not develop and implement a successful sales and marketing strategy, we
may not expand our business sufficiently to cover our expenses.
We
currently rely on a limited number of employees to market and promote our rEEG
Reports. To grow our business, we will need to develop and introduce new sales
and marketing programs and clinical education programs to promote the use of our
rEEG Reports by psychiatrists and physicians and higher additional employees for
this purpose. If we do not implement these new sales and marketing and education
programs in a timely and successful manner, we may not be able to achieve the
level of market awareness and sales required to expand our
business.
8
We
may fail to successfully manage and maintain the growth of our business, which
could adversely affect our results of operations.
As we
continue expanding our commercial operations, this expansion could place
significant strain on our management, operational, and financial
resources. To manage future growth, we will need to continue to hire,
train, and manage additional employees, particularly a specially trained sales
force to market our rEEG Reports.
In
addition, we have maintained a small financial and accounting staff, and our
reporting obligations as a public company, as well as our need to comply with
the requirements of the Sarbanes-Oxley Act of 2002, and the rules and
regulations of the SEC will continue to place significant demands on our
financial and accounting staff, on our financial, accounting and information
systems and on our internal controls. As we grow, we will need to add additional
accounting staff and continue to improve our financial, accounting and
information systems and internal controls in order to fulfill our reporting
responsibilities and to support expected growth in our business. Our current and
planned personnel, systems, procedures and controls may not be adequate to
support our anticipated growth or management may not be able to effectively
hire, train, retain, motivate and manage required personnel. Our failure to
manage growth effectively could limit our ability to achieve our marketing and
commercialization goals or to satisfy our reporting and other obligations as a
public company.
We
may not be able to adequately protect our intellectual property, which is the
core of our business.
We
consider the protection of our intellectual property to be critical to our
business prospects. We currently have three issued U.S. patents, as
well as issued patents in Australia and Israel, and we have filed separate
patent applications in multiple foreign jurisdictions.
In the
future, if we fail to file patent applications in a timely manner, or in the
event we elect not to file a patent application because of the costs associated
with patent prosecution, we may lose patent protection that we may have
otherwise obtained. The loss of any proprietary rights which are obtainable
under patent laws may result in the loss of a competitive advantage over present
or potential competitors, with a resulting decrease in revenues and
profitability for us.
With
respect to the applications we have filed, there is no guarantee that the
applications will result in issued patents, and further, any patents that do
issue may be too narrow in scope to adequately protect our intellectual property
and provide us with a competitive advantage. Competitors and others
may design around aspects of our technology, or alternatively may independently
develop similar or more advanced technologies that fall outside the scope of our
claimed subject matter but that can be used in the treatment of behavioral
health disorders.
In
addition, even if we are issued additional patents covering our products, we
cannot predict with certainty whether or not we will be able to enforce our
proprietary rights, and whether our patents will provide us with adequate
protection against competitors. We may be forced to engage in costly
and time consuming litigation or reexamination proceedings to protect our
intellectual property rights, and our opponents in such proceedings may have and
be willing to expend, substantially greater resources than we are able
to. In addition, the results of such proceedings may result in our
patents being invalidated or reduced in scope. These developments
could cause a decrease in our operating income and reduce our available cash
flow, which could harm our business and cause our stock price to
decline.
9
We also
utilize processes and technology that constitute trade secrets, such as our CNS
Database, and we must implement appropriate levels of security for those trade
secrets to secure the protection of applicable laws, which we may not do
effectively. In addition, the laws of many foreign countries do not
protect proprietary rights as fully as the laws of the United
States.
While we
have not had any significant issues to date, the loss of any of our trade
secrets or proprietary rights which may be protected under the foregoing
intellectual property safeguards may result in the loss of our competitive
advantage over present and potential competitors.
Confidentiality
agreements with employees, licensees and others may not adequately prevent
disclosure of trade secrets and other proprietary information.
In order
to protect our proprietary technology and processes, we rely in part on
confidentiality provisions in our agreements with employees, licensees, treating
physicians and psychiatrists and others. These agreements may not effectively
prevent disclosure of confidential information and may not provide an adequate
remedy in the event of unauthorized disclosure of confidential
information. Moreover, policing compliance with our confidentiality
agreements and non-disclosure agreements, and detecting unauthorized use of our
technology is difficult, and we may be unable to determine whether piracy of our
technology has occurred. In addition, others may independently
discover our trade secrets and proprietary information. Costly and
time-consuming litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business
position.
The
Liability of Our Directors and Officers Is Limited.
The
applicable provisions of the Delaware General Corporate Law and our Certificate
of Incorporation limit the liability of our directors to the Company and our
stockholders for monetary damages for breaches of their fiduciary duties, with
certain exceptions, and for other specified acts or omissions of such persons.
In addition, the applicable provisions of the Delaware General Corporate Law and
of our Certificate of Incorporation and Bylaws, as well as indemnification
agreements we have entered into with our directors, officers and certain other
individuals, provide for indemnification of such persons under certain
circumstances. In the event we are required to indemnify any of our
directors or any other person, our financial strength may be harmed, which may
in turn lower our stock price.
Although
we believe we are not currently subject to regulatory approval for the sale of
our rEEG Reports, regulations are constantly changing, and in the future our
business may be subject to regulation.
As
discussed in the “Business” section of this prospectus under the heading
“Government Regulation”, we do not believe that sales of our Laboratory
Information Services, including our rEEG Reports, are subject to regulatory
approval. However, federal, state and foreign laws and regulations
relating to the sale of our rEEG Reports are subject to future changes, as are
administrative interpretations of regulatory agencies. If we fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions, including injunctions preventing us from conducting our
business, withdrawal of clearances or approvals and civil and criminal
penalties. In the event that federal, state, and foreign laws and
regulations change, we may need to incur additional costs to seek government
approvals in order to sell our rEEG Reports. There is no guarantee
that we will be able to obtain such approvals in a timely manner or at all, and
as a result, our business would be significantly harmed.
10
If
we do not retain our senior management and other key employees, we may not be
able to successfully implement our business strategy.
Our
future success depends on the ability, experience and performance of our senior
management and our key professional personnel. Our success therefore
depends to a significant extent on retaining the services of George Carpenter,
our Chief Executive Officer, our senior product development and clinical
managers, and others. Because of their ability and experience, if we
lose one or more of the members of our senior management or other key employees,
our ability to successfully implement our business strategy could be seriously
harmed. While we believe our relationships with our executives are
good and do not anticipate any of them leaving in the near future, the loss of
the services of any of our senior management could have a material adverse
effect on our ability to manage our business. We do not carry key man
life insurance on any of our key employees.
If
we do not attract and retain skilled personnel, we may not be able to expand our
business.
Our
products and services are based on a complex database of
information. Accordingly, we require skilled medical, scientific and
administrative personnel to sell and support our products and services. Our
future success will depend largely on our ability to continue to hire, train,
retain and motivate additional skilled personnel, particularly sales
representatives who are responsible for customer education and training and
customer support. In the future, if we pursue our pharmaceutical
opportunities, we will also likely need to hire personnel with experience in
clinical testing and matters relating to obtaining regulatory
approvals. If we are not able to attract and retain skilled
personnel, we will not be able to continue our development and commercialization
activities.
In
the future we could be subject to personal injury claims, which could result in
substantial liabilities that may exceed our insurance coverage.
All
significant medical treatments and procedures, including treatment that is
facilitated through the use of our rEEG Reports, involve the risk of serious
injury or death. While we have not been the subject of any personal injury
claims for patients treated by providers using our rEEG Reports, our business
entails an inherent risk of claims for personal injuries, which are subject to
the attendant risk of substantial damage awards. We cannot control whether
individual physicians and psychiatrists will properly select patients, apply the
appropriate standard of care, or conform to our procedures in determining how to
treat their patients. A significant source of potential liability is negligence
or alleged negligence by physicians treating patients with the aid of the rEEG
Reports that we provide. There can be no assurance that a future claim or claims
will not be successful or, including the cost of legal defense, will not exceed
the limits of available insurance coverage.
We
currently have general liability and medical professional liability insurance
coverage for up to $5 million per year for personal injury claims. We may
not be able to maintain adequate liability insurance, in accordance with
standard industry practice, with appropriate coverage based on the nature and
risks of our business, at acceptable costs and on favorable terms. Insurance
carriers are often reluctant to provide liability insurance for new healthcare
services companies and products due to the limited claims history for such
companies and products. In addition, based on current insurance markets, we
expect that liability insurance will be more difficult to obtain and that
premiums will increase over time and as the volume of patients treated by
physicians that are guided by our rEEG Reports increases. In the
event of litigation, regardless of its merit or eventual outcome, or an award
against us during a time when we have no available insurance or insufficient
insurance, we may sustain significant losses of our operating capital which may
substantially reduce stockholder equity in the company.
11
If
government and third-party payers fail to provide coverage and adequate payment
rates for treatments that are guided by our rEEG Reports, our revenue and
prospects for profitability will be harmed.
Our
future revenue growth will depend in part upon the availability of reimbursement
from third-party payers for psychiatrists and physicians who use our rEEG
Reports to guide the treatment of their patients. Such third-party payers
include government health programs such as Medicare and Medicaid, managed care
providers, private health insurers and other organizations. These third-party
payers are increasingly attempting to contain healthcare costs by demanding
price discounts or rebates and limiting both coverage on which procedures they
will pay for and the amounts that they will pay for new procedures. As a result,
they may not cover or provide adequate payment for treatments that are guided by
our rEEG Reports, which will discourage psychiatrists and physicians from
utilizing the information services we provide. We may need to conduct
studies in addition to those we have already announced to demonstrate the
cost-effectiveness of treatments that are guided by our products and services to
such payers’ satisfaction. Such studies might require us to commit a significant
amount of management time and financial and other resources. Adequate
third-party reimbursement might not be available to enable us to realize an
appropriate return on investment in research and product development, and the
lack of such reimbursement could have a material adverse effect on our
operations and could adversely affect our revenues and earnings.
We
are subject to evolving and expensive corporate governance regulations and
requirements. Our failure to adequately adhere to these requirements or the
failure or circumvention of our controls and procedures could seriously harm our
business.
Because
we are a publicly traded company we are subject to certain federal, state and
other rules and regulations, including applicable requirements of the
Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly
and requires a significant diversion of management time and attention,
particularly with regard to our disclosure controls and procedures and our
internal control over financial reporting. Although we have reviewed
our disclosure and internal controls and procedures in order to determine
whether they are effective, our controls and procedures may not be able to
prevent errors or frauds in the future. Faulty judgments, simple errors or
mistakes, or the failure of our personnel to adhere to established controls and
procedures may make it difficult for us to ensure that the objectives of the
control system are met. A failure of our controls and procedures to detect other
than inconsequential errors or fraud could seriously harm our business and
results of operations.
Our
senior management’s limited recent experience managing a publicly traded company
may divert management’s attention from operations and harm our
business.
Our
management team has relatively limited recent experience managing a publicly
traded company and complying with federal securities laws, including compliance
with recently adopted disclosure requirements on a timely basis. Our
management will be required to design and implement appropriate programs and
policies in responding to increased legal, regulatory compliance and reporting
requirements, and any failure to do so could lead to the imposition of fines and
penalties and harm our business.
12
We
are currently in litigation with our former Chief Executive Officer and former
director, Leonard Brandt, relating to his attempt to replace the Board of
Directors with his own nominees.
Since
June of 2009, we have been involved in litigation against Leonard J. Brandt, a
stockholder, former director and our former Chief Executive Officer in the
Delaware Chancery Court and the United States District Court for the Central
District of California. We have expended substantial resources in
connection with this litigation. As further described in this
prospectus in the “Business” section under the heading “Legal Proceedings”, on
December 2, 2009, following a two day trial before the Delaware Court of
Chancery, we prevailed in certain actions that were pending between the Company
and Mr. Brandt. As a result of the victory in the Chancery Court
(which is currently being appealed by Brandt), we are currently evaluating
whether to continue to pursue our pending action in the United States District
Court against Mr. Brandt. Mr. Brandt has filed counterclaims in
that action and may choose to proceed with his counterclaims. We
believe these counterclaims are without merit, and intend to vigorously defend
against them if necessary. Although the December 2, 2009 post-trial
ruling by the Delaware Chancery Court appears to us to be definitive and
dispositive, we will be required to expend additional resources as a result of
the appeals to the Delaware Supreme Court filed by Brandt. We also do
not know whether Mr. Brandt will institute new claims against us and the
defense of any such claims could involve the expenditure of additional resources
by the Company. If the litigation continues, these costs could impact
the expected use of proceeds of the second, third and fourth closings of our
private placement in which we raised net proceeds of $3,130,400, and could make
it more difficult for us to raise any additional funds needed to finance our
corporate and working capital needs.
Risks
Related To Our Industry
The
healthcare industry in which we operate is subject to substantial regulation by
state and federal authorities, which could hinder, delay or prevent us from
commercializing our products and services.
Healthcare
companies are subject to extensive and complex federal, state and local laws,
regulations and judicial decisions governing various matters such as the
licensing and certification of facilities and personnel, the conduct of
operations, billing policies and practices, policies and practices with regard
to patient privacy and confidentiality, and prohibitions on payments for the
referral of business and self-referrals. There are federal and state laws,
regulations and judicial decisions that govern patient referrals, physician
financial relationships, submission of healthcare claims and inducement to
beneficiaries of federal healthcare programs. Many states prohibit business
corporations from practicing medicine, employing or maintaining control over
physicians who practice medicine, or engaging in certain business practices,
such as splitting fees with healthcare providers. Many healthcare laws and
regulations applicable to our business are complex, applied broadly and subject
to interpretation by courts and government agencies. Our failure, or the failure
of physicians and psychiatrists to whom we sell our rEEG Reports, to comply with
these healthcare laws and regulations could create liability for us and
negatively impact our business.
In
addition, the FDA regulates development, testing, labeling, manufacturing,
marketing, promotion, distribution, record-keeping and reporting requirements
for prescription drugs. Compliance with laws and regulations enforced by the FDA
and other regulatory agencies may be required in relation to future products or
services developed or used by us. Failure to comply with applicable laws and
regulations may result in various adverse consequences, including withdrawal of
our products and services from the market, or the imposition of civil or
criminal sanctions.
We
believe that this industry will continue to be subject to increasing regulation,
political and legal action and pricing pressures, the scope and effect of which
we cannot predict. Legislation is continuously being proposed, enacted and
interpreted at the federal, state and local levels to regulate healthcare
delivery and relationships between and among participants in the healthcare
industry. Any such changes could prevent us from marketing some or all of our
products and services for a period of time or permanently.
13
We
may be subject to regulatory and investigative proceedings, which may find that
our policies and procedures do not fully comply with complex and changing
healthcare regulations.
While we
have established policies and procedures that we believe will be sufficient to
ensure that we operate in substantial compliance with applicable laws,
regulations and requirements, the criteria are often vague and subject to change
and interpretation. We may become the subject of regulatory or other
investigations or proceedings, and our interpretations of applicable laws and
regulations may be challenged. The defense of any such challenge could result in
substantial cost and a diversion of management’s time and attention. Thus, any
such challenge could have a material adverse effect on our business, regardless
of whether it ultimately is successful. If we fail to comply with any applicable
laws, or a determination is made that we have failed to comply with these laws,
our financial condition and results of operations could be adversely
affected.
Failure
to comply with the Federal Trade Commission Act or similar state laws could
result in sanctions or limit the claims we can make.
The
Company’s promotional activities and materials, including advertising to
consumers and physicians, and materials provided to third parties for their use
in promoting our products and services, are regulated by the Federal Trade
Commission (FTC) under the FTC Act, which prohibits unfair and deceptive
acts and practices, including claims which are false, misleading or inadequately
substantiated. The FTC typically requires competent and reliable scientific
tests or studies to substantiate express or implied claims that a product or
service is effective. If the FTC were to interpret our promotional materials as
making express or implied claims that our products and services are effective
for the treatment of mental illness, it may find that we do not have adequate
substantiation for such claims. Failure to comply with the FTC Act or similar
laws enforced by state attorneys general and other state and local officials
could result in administrative or judicial orders limiting or eliminating the
claims we can make about our products and services, and other sanctions
including fines.
Our
business practices may be found to constitute illegal fee-splitting or corporate
practice of medicine, which may lead to penalties and adversely affect our
business.
Many
states, including California, in which our principal executive offices are
located, have laws that prohibit business corporations, such as us, from
practicing medicine, exercising control over medical judgments or decisions of
physicians, or engaging in certain arrangements, such as employment or
fee-splitting, with physicians. Courts, regulatory authorities or other parties,
including physicians, may assert that we are engaged in the unlawful corporate
practice of medicine through our ownership of the Neuro-Therapy Clinic or by
providing administrative and ancillary services in connection with our rEEG
Reports. These parties may also assert that selling our rEEG Reports for a
portion of the patient fees constitutes improper fee-splitting. If
asserted, such claims could subject us to civil and criminal penalties and
substantial legal costs, could result in our contracts being found legally
invalid and unenforceable, in whole or in part, or could result in us being
required to restructure our contractual arrangements, all with potentially
adverse consequences to our business and our stockholders.
Our
business practices may be found to violate anti-kickback, self-referral or false
claims laws, which may lead to penalties and adversely affect our
business.
The
healthcare industry is subject to extensive federal and state regulation with
respect to financial relationships and “kickbacks” involving healthcare
providers, physician self-referral arrangements, filing of false claims and
other fraud and abuse issues. Federal anti-kickback laws and regulations
prohibit certain offers, payments or receipts of remuneration in return for (i)
referring patients covered by Medicare, Medicaid or other federal health care
program, or (ii) purchasing, leasing, ordering or arranging for or recommending
any service, good, item or facility for which payment may be made by a federal
health care program. In addition, federal physician self-referral legislation,
commonly known as the Stark law, generally prohibits a physician from ordering
certain services reimbursable by Medicare, Medicaid or other federal healthcare
program from any entity with which the physician has a financial relationship.
In addition, many states have similar laws, some of which are not limited to
services reimbursed by federal healthcare programs. Other federal and state laws
govern the submission of claims for reimbursement, or false claims laws. One of
the most prominent of these laws is the federal False Claims Act, and violations
of other laws, such as the anti-kickback laws or the FDA prohibitions against
promotion of off-label uses of medications, may also be prosecuted as violations
of the False Claims Act.
14
While we
believe we have structured our relationships to comply with all applicable
requirements, federal or state authorities may claim that our fee arrangements,
agreements and relationships with contractors and physicians violate these
anti-kickback, self-referral or false claims laws and regulations. These laws
are broadly worded and have been broadly interpreted by courts. It is often
difficult to predict how these laws will be applied, and they potentially
subject many typical business arrangements to government investigation and
prosecution, which can be costly and time consuming. Violations of these laws
are punishable by monetary fines, civil and criminal penalties, exclusion from
participation in government-sponsored health care programs and forfeiture of
amounts collected in violation of such laws. Some states also have similar
anti-kickback and self-referral laws, imposing substantial penalties for
violations. If our business practices are found to violate any of these
provisions, we may be unable to continue with our relationships or implement our
business plans, which would have an adverse effect on our business and results
of operations.
We
may be subject to healthcare anti-fraud initiatives, which may lead to penalties
and adversely affect our business.
State and
federal governments are devoting increased attention and resources to anti-fraud
initiatives against healthcare providers, taking an expansive definition of
fraud that includes receiving fees in connection with a healthcare business that
is found to violate any of the complex regulations described above. While to our
knowledge we have not been the subject of any anti-fraud investigations, if such
a claim were made defending our business practices could be time consuming and
expensive, and an adverse finding could result in substantial penalties or
require us to restructure our operations, which we may not be able to do
successfully.
Our
use and disclosure of patient information is subject to privacy and security
regulations, which may result in increased costs.
In
conducting research or providing administrative services to healthcare providers
in connection with the use of our rEEG Reports, as well as in our Clinical
Services business, we may collect, use, maintain and transmit patient
information in ways that will be subject to many of the numerous state, federal
and international laws and regulations governing the collection, dissemination,
use and confidentiality of patient-identifiable health information, including
the federal Health Insurance Portability and Accountability Act (HIPAA) and
related rules. The three rules that were promulgated pursuant to HIPAA that
could most significantly affect our business are the Standards for Electronic
Transactions, or Transactions Rule; the Standards for Privacy of Individually
Identifiable Health Information, or Privacy Rule; and the Health Insurance
Reform: Security Standards, or Security Rule. HIPAA applies to
covered entities, which include most healthcare facilities and health plans that
may contract for the use of our services. The HIPAA rules require covered
entities to bind contractors like us to compliance with certain burdensome HIPAA
rule requirements.
15
The HIPAA
Transactions Rule establishes format and data content standards for eight of the
most common healthcare transactions. If we perform billing and collection
services on behalf of psychiatrists and physicians, we may be engaging in one of
more of these standard transactions and will be required to conduct those
transactions in compliance with the required standards. The HIPAA Privacy Rule
restricts the use and disclosure of patient information, requires entities to
safeguard that information and to provide certain rights to individuals with
respect to that information. The HIPAA Security Rule establishes elaborate
requirements for safeguarding patient information transmitted or stored
electronically. We may be required to make costly system purchases and
modifications to comply with the HIPAA rule requirements that are imposed on us
and our failure to comply may result in liability and adversely affect our
business.
Numerous
other federal and state laws protect the confidentiality of personal and patient
information. These laws in many cases are not preempted by the HIPAA rules and
may be subject to varying interpretations by courts and government agencies,
creating complex compliance issues for us and the psychiatrists and physicians
who purchase our services, and potentially exposing us to additional expense,
adverse publicity and liability.
Risks
Relating To Investment In Our Common Stock
We
have a limited trading volume and shares eligible for future sale by our current
stockholders may adversely affect our stock price.
Bid and
ask prices for shares of our Common Stock are quoted on NASD’s Over-the-Counter
Bulletin Board under the symbol CNSO.OB. There is currently no broadly followed,
established trading market for our Common Stock and an established trading
market for our shares of Common Stock may never develop or be maintained. Active
trading markets generally result in lower price volatility and more efficient
execution of buy and sell orders. The absence of an active trading market
reduces the liquidity of our Common Stock. As long as this condition continues,
the sale of a significant number of shares of common stock at any particular
time could be difficult to achieve at the market prices prevailing immediately
before such shares are offered. Also, as a result of this lack of trading
activity, the quoted price for our Common Stock on the Over-the-Counter Bulletin
Board is not necessarily a reliable indicator of its fair market value. If we
cease to be quoted, holders would find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, our Common Stock, and the
market value of our Common Stock would likely decline.
If
and when a larger trading market for our Common Stock develops, the market price
of our Common Stock is likely to be highly volatile and subject to wide
fluctuations, and you may be unable to resell your shares at or above the price
at which you acquired them.
The
market price of our Common Stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:
·
|
quarterly
variations in our revenues and operating
expenses;
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·
|
developments
in the financial markets and worldwide or regional
economies;
|
·
|
announcements
of innovations or new products or services by us or our
competitors;
|
·
|
announcements
by the government relating to regulations that govern our
industry;
|
·
|
significant
sales of our Common Stock or other securities in the open
market;
|
·
|
variations
in interest rates;
|
·
|
changes
in the market valuations of other comparable companies;
and
|
·
|
changes
in accounting principles.
|
16
In the
past, stockholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s
securities. If a stockholder were to file any such class action suit
against us, we would incur substantial legal fees and our management’s attention
and resources would be diverted from operating our business to respond to the
litigation, which could harm our business.
Future
sales of our Common Stock in the public market could cause our stock price to
fall.
The sale
of shares of our common stock which are registered for resale on this prospectus
or other shares eligible for resale pursuant to Rule 144 of the Securities Act
of 1933, as amended, or otherwise, could depress the market price of our Common
Stock. A reduced market price for our Common Stock could make it more
difficult to raise funds through future offering of Common Stock.
The
sale of securities by us in any equity or debt financing could result in
dilution to our existing stockholders and have a material adverse effect on our
earnings.
Any sale
of Common Stock by us in a future private placement could result in dilution to
our existing stockholders as a direct result of our issuance of additional
shares of our capital stock. In addition, our business strategy may
include expansion through internal growth, by acquiring complementary
businesses, by acquiring or licensing additional products and services, or by
establishing strategic relationships with targeted customers and suppliers. In
order to do so, or to finance the cost of our other activities, we may issue
additional equity securities that could dilute our stockholders' stock
ownership. We may also assume additional debt and incur impairment losses
related to goodwill and other tangible assets if we acquire another company and
this could negatively impact our earnings and results of
operations.
The
trading of our Common Stock on the Over-the-Counter Bulletin Board and the
potential designation of our Common Stock as a “penny stock” could impact the
trading market for our Common Stock.
Our
securities, as traded on the Over-the-Counter Bulletin Board, may be subject to
SEC rules that impose special sales practice requirements on broker-dealers who
sell these securities to persons other than established customers or accredited
investors. For the purposes of the rule, the phrase “accredited
investors” means, in general terms, institutions with assets in excess of
$5,000,000, or individuals having a net worth in excess of $1,000,000 or having
an annual income that exceeds $200,000 (or that, when combined with a spouse’s
income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser’s written agreement to the transaction before the
sale. Consequently, the rule may affect the ability of broker-dealers
to sell our securities and also may affect the ability of purchasers to sell
their securities in any market that might develop therefor.
In
addition, the SEC has adopted a number of rules to regulate “penny stock” that
restrict transactions involving these securities. Such rules include
Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the Securities and Exchange Act of 1934, as amended. These rules may have the
effect of reducing the liquidity of penny stocks. “Penny stocks”
generally are equity securities with a price of less than $5.00 per share (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ Stock Market if current price and volume information with respect to
transactions in such securities is provided by the exchange or
system). Because our securities may constitute “penny stock” within
the meaning of the rules, the rules would apply to us and to our
securities. If our securities become subject to the penny stock
rules, our stockholders may find it more difficult to sell their
securities.
17
Stockholders
should be aware that, according to SEC, the market for penny stocks has suffered
in recent years from patterns of fraud and abuse. Such patterns
include (i) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) “boiler room” practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, resulting in investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our
securities.
We
have not paid dividends in the past and do not expect to pay dividends for the
foreseeable future, and any return on investment may be limited to potential
future appreciation on the value of our Common Stock.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at
the discretion of our Board of Directors after taking into account various
factors, including without limitation, our financial condition, operating
results, cash needs, growth plans and the terms of any credit agreements that we
may be a party to at the time. To the extent we do not pay dividends,
our stock may be less valuable because a return on investment will only occur if
and to the extent our stock price appreciates, which may never
occur. In addition, investors must rely on sales of their Common
Stock after price appreciation as the only way to realize their investment, and
if the price of our stock does not appreciate, then there will be no return on
investment. Investors seeking cash dividends should not purchase our
Common Stock.
Our
officers, directors and principal stockholders can exert significant influence
over us and may make decisions that are not in the best interests of all
stockholders.
Our
officers, directors and principal stockholders (greater than 5% stockholders)
collectively control approximately 42% of our issued and outstanding Common
Stock. As a result, these stockholders are able to affect the outcome of, or
exert significant influence over, all matters requiring stockholder approval,
including the election and removal of directors and any change in control. In
particular, this concentration of ownership of our Common Stock could have the
effect of delaying or preventing a change of control of us or otherwise
discouraging or preventing a potential acquirer from attempting to obtain
control of us. This, in turn, could have a negative effect on the market price
of our Common Stock. It could also prevent our stockholders from realizing a
premium over the market prices for their shares of Common Stock. Moreover, the
interests of this concentration of ownership may not always coincide with our
interests or the interests of other stockholders, and accordingly, they could
cause us to enter into transactions or agreements that we would not otherwise
consider.
Transactions
engaged in by our largest stockholders, our directors or executives involving
our common stock may have an adverse effect on the price of our
stock.
Our
officers, directors and principal stockholders (greater than 5% stockholders)
collectively control approximately 42% of our issued and outstanding Common
Stock. Subsequent sales of our shares by these stockholders could have the
effect of lowering our stock price. The perceived risk associated with the
possible sale of a large number of shares by these stockholders, or the adoption
of significant short positions by hedge funds or other significant investors,
could cause some of our stockholders to sell their stock, thus causing the price
of our stock to decline. In addition, actual or anticipated downward pressure on
our stock price due to actual or anticipated sales of stock by our directors or
officers could cause other institutions or individuals to engage in short sales
of our Common Stock, which may further cause the price of our stock to
decline.
18
From time
to time our directors and executive officers may sell shares of our common stock
on the open market. These sales will be publicly disclosed in filings made with
the SEC. In the future, our directors and executive officers may sell a
significant number of shares for a variety of reasons unrelated to the
performance of our business. Our stockholders may perceive these sales as a
reflection on management's view of the business and result in some stockholders
selling their shares of our common stock. These sales could cause the price of
our stock to drop.
Anti-takeover
provisions may limit the ability of another party to acquire us, which could
cause our stock price to decline.
Delaware
law contains provisions that could discourage, delay or prevent a third party
from acquiring us, even if doing so may be beneficial to our stockholders, which
could cause our stock price to decline. In addition, these provisions could
limit the price investors would be willing to pay in the future for shares of
our Common Stock.
19
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, including the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” contains “forward-looking statements” that include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These forward-looking statements include, without limitation, statements
regarding: proposed new products or services; our statements concerning
litigation or other matters; statements concerning projections, predictions,
expectations, estimates or forecasts for our business, financial and operating
results and future economic performance; statements of management’s goals and
objectives; trends affecting our financial condition, results of operations or
future prospects; our financing plans or growth strategies; and other similar
expressions concerning matters that are not historical facts. Words such as
“may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,”
“expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and
“estimates,” and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking statements
are based on information available at the time they are made and/or management’s
good faith belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause these differences include, but
are not limited to:
|
·
|
our
inability to raise additional funds to support operations and capital
expenditures;
|
|
·
|
our
inability to achieve greater and broader market acceptance of our products
and services in existing and new market
segments;
|
|
·
|
our
inability to successfully compete against existing and future
competitors;
|
|
·
|
our
inability to manage and maintain the growth of our
business;
|
|
·
|
our
inability to protect our intellectual property rights;
and
|
|
·
|
other
factors discussed under the headings “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
and “Business.”
|
Forward-looking
statements speak only as of the date they are made. You should not put undue
reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information, except to the
extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.
20
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of shares to be offered by the selling
stockholders. The proceeds from the sale of each selling stockholder’s common
stock will belong to that selling stockholder.
MARKET
FOR COMMON EQUITY
AND
RELATED STOCKHOLDER MATTERS
Common
Stock
Our
common stock is currently listed for trading on the OTC Bulletin Board under the
symbol CNSO.OB. The following table sets forth, for the periods indicated, the
high and low bid information for Common Stock as determined from sporadic
quotations on the OTC Bulletin Board. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
High
|
Low
|
|||||||
Year
Ended September 30, 2008
|
||||||||
First
Quarter
|
$ | 0.90 | $ | 0.75 | ||||
Second
Quarter
|
$ | 2.25 | $ | 0.75 | ||||
Third
Quarter
|
$ | 3.00 | $ | 0.55 | ||||
Fourth
Quarter
|
$ | 0.75 | $ | 0.51 | ||||
Year
Ended September 30, 2009
|
||||||||
First
Quarter
|
$ | 1.01 | $ | 0.10 | ||||
Second
Quarter
|
$ | 0.90 | $ | 0.05 | ||||
Third
Quarter
|
$ | 0.69 | $ | 0.15 | ||||
Fourth
Quarter
|
$ | 0.72 | $ | 0.20 | ||||
Year
Ended September 30, 2010
|
||||||||
First
Quarter
|
$ | 1.20 | $ | 0.50 |
On
January 27, 2010, the closing sales price of our common stock as reported on the
OTC Bulletin Board was $0.52 per share. As of January 27, 2010, there were 377
record holders of our common stock. The number of holders of record is based on
the actual number of holders registered on the books of our transfer agent and
does not reflect holders of shares in “street name” or persons, partnerships,
associations, corporations or other entities identified in security position
listings maintained by depository trust companies.
Dividends
We have
not paid or declared cash distributions or dividends on our common stock. CNS
California has never paid dividends on its common stock. We do not intend to pay
cash dividends on our common stock in the foreseeable future. We currently
intend to retain all earnings, if and when generated, to finance our operations.
The declaration of cash dividends in the future will be determined by the board
of directors based upon our earnings, financial condition, capital requirements
and other relevant factors.
21
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes provided elsewhere in this
prospectus. This discussion summarizes the significant factors affecting the
condensed consolidated operating results, financial condition and liquidity and
cash flows of CNS Response, Inc. for the fiscal years ended September 30, 2009
and 2008. Except for historical information, the matters discussed in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks
and uncertainties and are based on the beliefs and assumptions of our management
as of the date hereof based on information currently available to our
management. Use of words such as “believes,” “expects,” “anticipates,”
“intends,” “plans,” “estimates,” “should,” “forecasts,” “goal,” “likely” or
similar expressions, indicate a forward-looking statement. Forward-looking
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions. Actual results may differ materially from the
forward-looking statements we make. See “Risk Factors” elsewhere in this
prospectus for a discussion of certain risks associated with our business. We
disclaim any obligation to update forward-looking statements for any
reason.
Overview
We are a
life sciences company with two distinct business segments. Our Laboratory
Information Services business operated by CNS California, which we consider our
primary business, is focused on the commercialization of a patented system that
guides psychiatrists and other physicians to determine a proper treatment for
patients with behavioral (psychiatric and/or addictive) disorders. Our Clinical
Services business operated by Neuro-Therapy Clinic, ("NTC") is a full service
psychiatric clinic.
Laboratory
Information Services
In
connection with our Laboratory Information Services business, we have developed
an extensive proprietary database (the “CNS Database”) consisting of over 17,000
clinical outcomes across more than 2,000 patients who had psychiatric or
addictive problems. For each patient, we have compiled electrocephalographic
(“EEG”) data, symptoms and outcomes, often across multiple treatments from
multiple psychiatrists and physicians. Using this database, our technology
compares a patient’s EEG to the outcomes in the database and ranks treatment
options based on treatment success of patients having similar
neurophysiology.
Trademarked
as Referenced-EEG ® (“rEEG
®
”), this patented technology allows us to create and provide simple reports
(“rEEG Reports”) that specifically guide physicians to treatment strategies
based on the patient’s own physiology. The vast majority of these patients were
considered long-term “treatment-resistant”, the most challenging, high-risk and
expensive category to treat.
rEEG
identifies relevant neurophysiology that is variant from the norm and identifies
medications that have successfully treated database patients having similar
aberrant physiology. It does this by comparing a patient’s standard digital EEG
to an external normative database, which identifies the presence of
abnormalities. The rEEG process then identifies a set of patients having similar
abnormalities as recorded in our CNS Database and reports on historical relative
medication success for this stratified group. Upon completion, the physician is
provided the analysis in a report detailing and ranking classes of agents (and
specific agents within the class) by treatment success for patients having
similar abnormal electrophysiology.
22
Our
business is focused on increasing the demand for our rEEG services. We believe
the key factors that will drive broader adoption of our rEEG services will be
acceptance by healthcare providers of their clinical benefits, demonstration of
the cost-effectiveness of using our test, reimbursement by third-party payers,
expansion of our sales force and increased marketing efforts.
Clinical
Services
In
January 2008, we acquired our largest customer, the Neuro-Therapy Clinic, Inc.
Upon the completion of the transaction, NTC became a wholly-owned subsidiary of
ours. NTC operates one of the largest psychiatric medication management
practices in the state of Colorado, with five full time and six part
time employees including psychiatrists and clinical nurse specialists with
prescribing privileges. Daniel A. Hoffman, M.D. is the medical director at NTC,
and, after the acquisition, became our Chief Medical Officer and more recently,
our President.
NTC,
having performed a significant number of rEEG’s, serves an important resource in
our product development, the expansion of our CNS Database, production system
development and implementation, along with the integration of our rEEG services
into a medical practice. Through NTC, we also expect to successfully develop
marketing and patient acquisition strategies for our Laboratory Information
Services business. Specifically, NTC is learning how to best communicate the
advantages of rEEG to patients and referring physicians in the local market. We
will share this knowledge and developed communication programs learned through
NTC with other physicians using our services, which we believe will help drive
market acceptance of our services. In addition, we plan to use NTC to train
practitioners across the country in the uses of rEEG technology.
We view
our Clinical Services business as secondary to our Laboratory Information
Services business, and we have no current plans to expand this business
.
Business
operations
Since our
inception, we have generated significant net losses. As of September 30, 2009,
we had an accumulated deficit of $25.2 million. We incurred operating losses of
$8.5 million and $5.4 million for the fiscal years ended September 30, 2009 and
2008, respectively. We expect our net losses to continue for at least the next
couple of years. We anticipate that a substantial portion of our capital
resources and efforts will be focused on research and development, scale up of
our commercial organization, and other general corporate purposes, including the
payment of legal fees associated with our litigation. Research and development
projects include the completion of more clinical trials which are necessary to
further validate the efficacy of our products and services relating to our rEEG
technology across different types of behavioral disorders, the enhancement of
the CNS Database and, to a lesser extent, the identification of new medications
that are often combinations of approved drugs.
Acquisition
of Neuro-Therapy Clinic
On
January 15, 2008, we acquired all of the outstanding common stock of NTC in
exchange for a non-interest bearing $300,000 note payable in equal monthly
installments over 36 months. The acquisition was accounted under the purchase
method of accounting, and accordingly, the purchase price was allocated to NTC’s
net tangible assets based on their estimated fair values as of January 15, 2008.
The excess purchase price over the value of the net tangible assets was recorded
as goodwill. The purchase price and the allocation thereof are as
follows:
Fair
value of note payable issued
|
$
|
265,900
|
||
Direct
transaction costs
|
43,700
|
|||
Purchase
price
|
309,600
|
|||
Allocated
to net tangible liabilities, including
cash of $32,100
|
(10,600
|
)
|
||
Allocated
to goodwill
|
$
|
320,200
|
23
The
acquisition was not material, and accordingly, no pro forma results are
presented. As of September 30, 2009 the goodwill was determined to be fully
impaired and was consequently written off.
The
2009 Private Placement Transaction
On August
26, 2009, we received gross proceeds of approximately $2,043,000 in the first
closing of our private placement transaction with six investors. Pursuant to
Subscription Agreements entered into with the investors, we sold approximately
38 Investment Units at $54,000 per Investment Unit. Each “Investment Unit”
consists of 180,000 shares of our common stock and a five year non-callable
warrant to purchase 90,000 shares of our common stock at an exercise price of
$0.30 per share. After commissions and expenses, we received net proceeds of
approximately $1,792,300 upon the first closing of our private placement. In
connection with the first closing, and as more fully described under Note 2 to
the financial statements contained in this prospectus, certain promissory notes
then outstanding were converted into shares of common stock and we issued
warrants to the investors in connection with the note conversions.
On
December 24, 2009, we had a second closing of our private placement in which we
received additional gross proceeds of approximately $2,996,000 from
approximately 30 investors. At the second closing, we sold approximately 55
Investment Units on the same terms and conditions as the Investment Units sold
at the first closing. After commissions and expenses, we received net proceeds
of approximately $2,650,400 in connection with the second closing of our private
placement.
On
December 31, 2009 and January 4, 2010 we completed a third and fourth closing of
our private placement in which we received additional gross proceeds of
approximately $540,000. We sold 10 Investment Units on the same terms and
conditions as the Investment Units sold in the first and second closings of the
private placement. After commissions and expenses, we received net proceeds of
approximately $480,000 in connection with the third and fourth closings of our
private placement.
Prior to
our private placement, we raised aggregate proceeds of $1,700,000 in 2009
through the issuance of secured convertible promissory notes on each of March
30, May 14, and June 12. Upon the first closing of our private placement on
August 26, 2009, these notes were converted into shares of our common
stock.
Matters
Involving our Former Chief Executive Officer and Former Director, Leonard
Brandt
On April
10, 2009, our Board of Directors voted to remove Len Brandt as the CEO of the
Company and appointed George Carpenter as our CEO. On the same date, Mr. Brandt
resigned as Chairman of the Board, but retained his seat on the Board of
Directors. On June 19, 2009, Mr. Brandt informed us of his intention to call a
special meeting of Company stockholders in lieu of an annual meeting, for the
purpose of unseating the other members of the Board and replacing them with his
nominees. Subsequently, Mr. Brandt made multiple mailings to stockholders
purporting to give notice of a meeting, scheduled multiple dates for the meeting
and attempted to call and adjourn meetings on at least six occasions. Mr. Brandt
failed to convene a quorum or take any action at any of these
meetings.
24
Mr.
Brandt finally attempted to call a special meeting of stockholders to be held on
September 4, 2009, and purportedly held a meeting on that date, at which he
claimed to have elected his own slate of directors. Subsequent to this purported
meeting, Mr. Brandt filed an action under Section 225 of the Delaware General
Corporation Law (“DGCL”) seeking to validate the results of that purported
meeting. Mr. Brandt also filed several other actions in the Delaware Chancery
Court as further described in the “Business” section of this prospectus, under
the heading “Legal Proceedings”. He filed claims for breach of fiduciary duty in
connection with the approval by our Board of the May 14, 2009 and June 18, 2009
bridge loans and the first closing of the private placement on August 26, 2009,
and made a motion to preliminarily enjoin the voting of certain shares of our
common stock and to prevent action by written consent by such stockholders. Mr.
Brandt also sought a permanent injunction against the voting of these shares and
to rescind their issuance. While these actions were pending, we were operating
under what is commonly referred to as a “status quo” order, which maintained the
Board of Directors in place immediately prior to the purported September 4
meeting (Messrs. Carpenter, Jones, Pappajohn, Thompson and Brandt, and Drs.
Harbin and Vaccaro). The status quo order also placed certain restrictions on
certain corporate actions during the pendency of the Section 225 action
described above.
As
further described in the “Business” section of this prospectus, under the
heading “Legal Proceedings”, on December 2, 2009, following a two day trial, the
Delaware Court of Chancery entered judgment for the Company and its incumbent
directors in the Section 225 action and dismissed the action with prejudice. The
entry of Judgment for the Company in the Section 225 action and dismissal of
that action terminated the “status quo” order, including its restrictions on the
Company’s ability to engage in certain corporate actions. The Chancery Court
also denied Brandt’s motion for an injunction that sought to prevent the voting
of shares issued by us in connection with our bridge financings in May and June
of 2009 and the securities offering in August 2009, dismissed Mr. Brandt's
counterclaims alleging breaches of duties in connection with those transactions,
and dismissed with prejudice another action brought by Mr. Brandt that claimed
he had not been provided with information owed to him. Finally, the Court
dismissed the claims by us against Mr. Brandt, without prejudice. As further
described in the “Business” section of this prospectus, under the heading “Legal
Proceedings”, on January 4, 2010, Brandt filed appeals with the Supreme Court of
the State of Delaware in relation to certain of the above matters, including the
Section 225 action, which the Company believes are without merit and intends to
vigourously defend.
On
September 29, 2009, we held an annual meeting of Stockholders at which each of
George Carpenter, Henry Harbin, M.D., David Jones, John Pappajohn, Jerome
Vaccaro, M.D. and Tommy Thompson were elected.
As
further described in the “Business” section of this prospectus, under the
heading “Legal Proceedings”, we filed an action in the United States District
Court for the Central District of California against Mr. Brandt and certain
others in July 2009. Our complaint alleges a variety of violations of federal
securities laws, including anti-fraud based claims under Rule 14a-9,
solicitation of proxies in violation of the filing and disclosure dissemination
requirements of Regulation 14A, and material misstatements and omissions in and
failures to promptly file amendments to Schedule 13D. Mr. Brandt and the other
defendants have filed counterclaims against us, alleging violations of federal
securities laws relating to alleged actions and statements taken or made by us
or our officers and directors in connection with Mr. Brandt’s proxy and consent
solicitations. Given our victory in the Delaware Court of Chancery (which is now
being appealed by Brandt), we have not determined whether or how we will pursue
this action. Mr. Brandt may choose to proceed with his
counterclaim.
We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt. Although the ruling by the Delaware Chancery Court
appears to us to be definitive and dispositive, we will be required to expend
additional resources as a result of the appeals to the Delaware Supreme Court
filed by Brandt. We also do not know whether Mr. Brandt will institute new
claims against us and the defense of any such claims could involve the
expenditure of additional resources by the Company.
25
Publicly
Announced Results of Clinical Trial
On
November 2, 2009, we reported the results of a landmark study presented by
Charles DeBattista, D.M.H, M.D., at the U.S. Psychiatric and Mental Health
Congress. The poster presentation, titled Referenced-EEG® (rEEG) Efficacy
Compared to STAR*D For Patients With Depression Treatment Failure: First Look At
Final Results, highlighted a dramatic improvement in personalized medicine
technology for use in treatment of patients with depression. In this study, our
rEEG technology proved effective at predicting medication response for
treatment-resistant patients approximately 65 percent of the time.
The study
included 114 patients in 12 medical centers, including Harvard, Stanford,
Cornell, UCI and Rush. The 12-week study found that rEEG significantly
outperformed the modified STAR*D treatment algorithm. The difference, or
separation, between rEEG and the control group was 50 and 100 percent for the
study’s two primary endpoints. Typically, separation between a new treatment and
a control group is less than 10 percent in antidepressant studies.
The
study, the largest in our history, was a randomized, blinded, controlled,
parallel group, multicenter study. The patients in the study experienced
depression treatment failure of one or more SSRIs and/or had failure with at
least two classes of antidepressants. The patients fell into two groups: 1)
those treated with rEEG medication guidance, and 2) those treated with the
modified STAR*D treatment algorithm.
Our Laboratory Information Services revenues are derived from the sale of rEEG
Reports to physicians. Physicians are generally billed upon delivery of a rEEG
Report. The list prices of our rEEG Reports to physicians range from $200 to
$800 with $400 being the most frequent charge.
Cost of revenues are for Laboratory Information Services and represent the cost of direct labor,
costs associated with external processing, analysis and consulting review
necessary to render an individualized test result and miscellaneous support
expenses. Costs associated with performing our tests are expensed as the tests
are performed. We continually evaluate the feasibility of hiring our own
personnel to perform most of the processing and analysis necessary to render an
rEEG Report.
Research and development expenses are associated
with our Laboratory Information Services and primarily represent costs incurred to
design and conduct clinical studies, to recruit patients into the studies, to
improve rEEG processing, to add data to the CNS Database, to improve analytical
techniques and advance application of the methodology to additional clinical
diagnosis. We charge all research and development expenses to operations as they
are incurred.
26
For our Laboratory Information Services, our selling and marketing expenses
consist primarily of personnel and media cost to inform consumers of our
products and services. Additional marketing expenses are the costs of educating
physicians, laboratory personnel, other healthcare professionals regarding our
products and services.
Our general and administrative expenses consist
primarily of personnel, occupancy, legal, consulting and administrative and
support costs for both our Laboratory Information Services and Clinical Services
businesses.
This
discussion and analysis of our financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses
and the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenues and expenses during the reporting
periods. We evaluate our estimates and judgments on an ongoing basis. We base
our estimates on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or
conditions.
27
As earlier described, we operate in two business
segments: Laboratory Information Services and Clinical Services. Our Laboratory
Information Services business focuses on the delivery of
reports ("rEEG Reports") that assist physicians with treatment strategies for
patients with behavioral (psychiatric and/or addictive) disorders based on the
patient's own physiology. Our Clinical Services business operated through NTC
provides full service psychiatric services. For comparative purposes below, our
Clinical Services business which represents
the operations of Neuro-Therapy Clinic are only included since its acquisition
on January 15, 2008.
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
|||||||
Revenues
|
100 | % | 100 | % | ||||
Cost
of revenues
|
19 | 21 | ||||||
Gross
profit
|
81 | 79 | ||||||
Research
and development
|
305 | 271 | ||||||
Sales
and marketing
|
131 | 114 | ||||||
General
and administrative expenses
|
555 | 402 | ||||||
Goodwill
impairment
|
46 | - | ||||||
Operating
loss
|
(956 | ) | (708 | ) | ||||
Other
income (expense), net
|
(261 | ) | 13 | |||||
Net
income (loss)
|
(1217 | )% | (695 | )% |
Revenues
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
Laboratory
Service Revenues
|
$ | 120,400 | $ | 178,500 | (33 | )% | ||||||
Clinical
Service Revenues
|
579,700 | 595,000 | (3 | )% | ||||||||
Total
Revenues
|
$ | 700,100 | $ | 773,500 | (9 | )% |
With
respect to our Laboratory Information Services business, the number of paid rEEG Reports
delivered during the year ended September 30, 2009 decreased to 321 from 476 in
2008 while the price per report was approximately $375 in both 2009 and 2008.
The reduction in revenues from the sale of our rEEG Reports is partly due to the
acquisition of NTC, which was our largest customer prior to its acquisition in
January 2008. Furthermore, the Company diverted its limited resources to focus
on conducting and completing its clinical trial. The clinical trial was
completed in September 2009 with top-line results announced in November 2009.
The Company is starting to scale up its sales and marketing efforts and has
entered into agreements with two payer groups to pilot the use of rEEG Reports.
We expect to drive broader adoption of our rEEG technology now that the clinical
trial is complete and accordingly, we anticipate that our Laboratory Service
Revenues will increase in fiscal 2010.
28
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
Cost
of Laboratory Information Services revenues
|
$ | 131,600 | $ | 163,200 | (19 | )% |
Cost of
Laboratory Information Services revenues consists of payroll, consulting,
and other miscellaneous costs. Consulting costs primarily represent external
costs associated with the processing and analysis of rEEG Reports and range
between $75 and $100 per rEEG Report. For the year ended September 30, 2009,
cost of revenues of $131,600 consist primarily of direct labor and benefit costs
of $99,600, which includes stock-based compensation and consulting fees of
$29,200. For the year ended September 30, 2008, cost of revenues of $163,200
consisted primarily of direct labor and benefit costs of $108,400, including
stock-based compensation and consulting fees of $48,600. We expect costs of
revenues will increase as an absolute number as more rEEG Reports are processed.
However, we expect cost of revenues to decrease as a percentage of revenues as
we improve our operating efficiency.
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
Laboratory
Information Services research and development
|
$ | 2,137,200 | $ | 2,097,300 | 2 | % |
Research
and development expenses consist of clinical study patient expenses, payroll and
benefit costs (including stock-based compensation), patents costs, consulting
fees, marketing and recruitment costs, database enhancements and maintenance,
travel and conference and other miscellaneous costs. Research and development
costs for the year ended September 30, 2009 totaled $2,137,200 and were largely
comprised of the following: clinical study patient costs of $789,300, payroll
and benefit costs of $792,100, patent costs of $213,100, consulting costs of
$105,700, marketing and recruiting costs $161,100, database costs of $16,800 and
travel and conference costs of $15,600. For the year ended September 30, 2008
research and development costs totaled $2,097,300 and were largely comprised of
the following: clinical study patient costs of $579,100, payroll and benefit
costs of $855,600, patent costs of $108,800, consulting costs of $285,000,
marketing and recruiting costs $136,200, database costs of $36,400 and travel
and conference costs of $50,200.
Clinical
study patient costs increased by $210,200 in fiscal 2009 as our clinical trial
was running for twelve months in fiscal 2009 compared to approximately nine
months in fiscal 2008. Patent costs also increased in fiscal 2009 by $104,300 as
a result of filing patent applications in Western Europe and marketing and
recruitment expenses increased by $25,000 in fiscal 2009 as we accelerated
patient enrollment in our clinical study. Conversely, payroll and benefit costs
declined in fiscal 2009 by $63,500 due to changes in the staff-mix and reduced
stock compensation and bonus expenses and consulting expenses declined by
$179,300 as expertise was brought in-house and the clinical trial moved beyond
the design stage which involved the use of consultants. In fiscal 2009, database
costs fell by $19,600 compared to fiscal 2008 as the company reduced development
efforts relating to the CNS Database.
29
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
Sales
and Marketing
|
||||||||||||
Laboratory
Information Services
|
$ | 908,500 | $ | 847,600 | 7 | % | ||||||
Clinical
Services
|
7,300 | 33,800 | (78 | )% | ||||||||
Total
Sales and Marketing
|
$ | 915,800 | $ | 881,400 | 4 | % |
Sales and marketing expenses associated with our
Laboratory Information Services business consist primarily of payroll and
benefit costs, consulting fees, marketing costs, computer services, travel and
conference costs and miscellaneous costs. Sales and marketing expenses for
fiscal 2009 were comprised of the following: payroll and benefit costs of
$596,200, consulting fees of $82,400, marketing costs of $147,600, computer
services costs of $31,700, and travel and conference costs of $40,600. For
fiscal 2008 the company incurred: payroll and benefit costs of $403,000,
consulting fees of $221,100, marketing costs of $18,500, computer services costs
of $25,000, and travel and conference costs of $110,900.
In fiscal
2009, payroll and benefits increased by $193,200 principally as a result of the
hiring of a Vice President for commercial operations and additional sales and
support staff. This increase was partially offset by a reduction in consulting
fees of $138,900 as marketing expertise was brought in house. Marketing expenses
increased in fiscal 2009 by $129,100 in an effort to advertise our rEEG
technology to service providers and consumers. This was partly offset by a
reduction in travel and conference costs of $70,300.
In fiscal
2010, we anticipate that sales and marketing expenses for Laboratory Information
Services will increase as we plan to increase our Direct-to-Consumer marketing.
Additionally, with the successful completion of our clinical trial, we plan to
introduce our rEEG technology to additional psychiatric providers and medical
insurance payers in fiscal 2010, which will also increase our sales and
marketing costs.
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
General
and administrative
|
||||||||||||
Laboratory
Information Services
|
3,217,800 | $ | 2,349,000 | 35 | % | |||||||
Clinical
Services
|
669,600 | 756,700 | (12 | )% | ||||||||
Total
General and administrative
|
$ | 3,887,400 | $ | 3,105,700 | 25 | % |
30
General and administrative expenses for our
Laboratory Information Services business are primarily related to salaries
and benefits (including stock-based compensation), legal and other professional
fees, consulting services, general administration and occupancy costs, dues and
fees, marketing and investor relations, and travel and conferences. For the year
ended September 30, 2009 these expenses were as follows: Salaries and benefits
$792,700, legal fees $1,362,000, other professional fees $151,300, consulting
costs $369,700, general administration and occupancy costs $183,000, dues and
fees $80,000, marketing and investor relations $86,500, and travel and
conference costs $69,800. For the year ended September 30, 2008 these expenses
were: Salaries and benefits $1,420,900, legal fees $193,900, other professional
fees $157,800, consulting costs $94,600, general administration and occupancy
costs $189,300, dues and fees $46,300, marketing and investor relations
$112,800, and travel and conference costs of $78,100.
Changes
in general and administrative expenditures in 2009 were as follows: Salaries and
benefit costs decreased by $628,200 as a result of staff reductions, including
the termination of our former CEO Leonard Brandt in April 2009, a non-recurring
bonus expense of $69,900 declared in 2008 that did not reoccur in 2009 and as a
result of stock based compensation charges falling $214,900 in fiscal 2009
compared to the prior year period. Partly offsetting the reduction in salaries
and benefits was an increase in consulting fees of $275,100 as a result of the
hiring of consultants to perform functions previous undertaken by salaried
employees. Legal fees increased by $1,168,100 in 2009 principally due to costs
associated with defending against lawsuits brought by our former CEO and
Chairman of the Board, Leonard Brandt, as well as our fund raising efforts. Dues
and fees increased by $33,800 in 2009 as a result of the payment of Delaware
Franchise taxes for 2009, Blue Sky filings necessitated by our private
placement, and increased transfer agent fees associated with the holding of our
annual stockholders’ meeting. Certain other costs categories decreased in 2009
including marketing and investor relations costs which decreased by
$26,300.
The
company incurred certain miscellaneous charges in 2009 which included Delaware
Franchise Tax assessments for fiscal 2007 and 2008 totaling $74,400;
additionally, the company accrued for a $34,800 payroll tax assessment which was
related to 2006, and a write-off of $22,600 of doubtful debts. In 2008 the
company wrote off $56,900 in costs associated with a financing effort that did
not materialize.
General
and administrative expenses for our Clinical Services business for the year
ended September 30, 2009 were $669,600 which includes all costs associated with
running the clinic, including all payroll costs, medical supply costs, occupancy
costs and other general and administrative costs. These costs declined $87,100
from $756,700 in 2008 primarily due to lower patient volume.
Goodwill
impairment charges
During
the fiscal year 2009, we conducted a goodwill impairment test and determined
that all of the goodwill related to the NTC acquisition was impaired.
Accordingly, we recorded a goodwill impairment charge of $320,200 for the year
ended September 30, 2009.
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
Laboratory Information
Services (Expense), net
|
$ | (1,822,700 | ) | $ | 104,600 | * | ||||||
Clinical
Services (Expense)
|
(200 | ) | (600 | ) | 33 | % | ||||||
Total
interest income (expense)
|
$ | (1,822,900 | ) | $ | 104,000 | * | ||||||
*
not meaningful
|
31
With respect to our Laboratory Information Services business, we incurred a $90,000 financing
fee in connection with the bridge note issued to Mr. Pappajohn on June 12, 2009,
$20,900 in interest expenses on the bridge notes issued to Mr. Brandt and Sail
Venture Partners. Additionally, $1,058,000 of expenses associated with the
valuation of bridge warrants and $642,000 associated with the value of the
beneficial conversion feature of the bridge notes were written off to interest
expense upon conversion of the bridge notes. Furthermore, $13,300 of interest
expense was incurred on long-term debt issued in connection with our acquisition
of NTC. These expenses were offset by interest income of $9,500 for the fiscal
year ended September 30, 2009 from interest bearing accounts. For the fiscal
year ended September 30, 2008, interest income of $127,000 was earned on cash in
interest bearing accounts. This was offset by $22,000 of interest expense on
long term debt.
Year Ended
September 30,
2009
|
Year Ended
September 30,
2008
|
Percent
Change
|
||||||||||
Laboratory
Information Services net loss
|
$
|
(8,451,300
|
)
|
$
|
(5,166,200
|
)
|
64
|
%
|
||||
Clinical
Services net loss
|
(70,900
|
)
|
(205,300
|
)
|
(35
|
)%
|
||||||
Total
Net Loss
|
$
|
(8,522
,200
|
)
|
$
|
(5,371,500
|
)
|
59
|
%
|
The
decrease in the net loss for Clinical Services of $134,400 for the year ended
September 30, 2009 is primarily due to reduced marketing expenses and reduced
general and administrative expenses.
We expect
to incur a net loss in fiscal 2010 as we continue improving our rEEG technology
and focus on the commercialization of our products.
As of September 30, 2009 we had approximately $0.99
million in cash and cash equivalents and a working capital deficit of
approximately $1.1 million compared to approximately $2.0 million in cash and
cash equivalents and a working capital balance of approximately $0.83 million at September 30, 2008.
32
Upon
closing of the second, third and fourth tranches of our private placement on
December 24, 2009, December 31, 2009, and January 4, 2010, respectively, we
raised a further $3,130,400 net of closing costs.
Net cash used in operating activities was $4.6
million for the fiscal year ended September 30, 2009 compared to $3.7 million
for fiscal year ended September 30, 2008. The increase in cash used of $0.9
million was primarily attributable to increased legal fees associated with the
Brandt litigation, our private placement and bridge financings, investigation of
FDA licensure issues and the filing of patent applications.
Net cash
used in investing activities was $2,000 for the purchase of office equipment for
the fiscal year ended September 30, 2009 as compared to $74,600 for the fiscal
year ended September 30, 2008. Our 2008 investing activities related to the
acquisition of the Neuro-Therapy Clinic and the purchase of furniture and
equipment for our offices.
Net cash
proceeds from financing activities for the fiscal year ended September 30, 2009
were $1.8 million, net of offering costs, raised on August 26, 2009 in
connection with the first closing of our private placement transaction; $1.7
million raised in bridge financing transactions (which ultimately converted into
equity as further described under Note 2 to the Financial Statements included
elsewhere in this prospectus), and $295,500 due to the exercise of options and
warrants. These proceeds were partly offset by the repayment of a convertible
promissory note, with accrued interest, totaling $92,600 and the repayment of
$86,700 on a promissory note issued to Daniel Hoffman in connection with our
acquisition of NTC. Net cash used by financing activities in 2008 primarily
related to the payment of $60,600 on a promissory note in connection with our
NTC acquisition.
On
January 22, 2010, we moved to our new leased facility for our headquarters and
Laboratory Information Services business, located at 85 Enterprise, Suite 410,
Aliso Viejo, California 92656. We entered into a 36 month lease for the 2,023
square foot facility, which expires on January 31, 2013. The average cost of the
lease for the period is $3,642 per month.
33
We expect to continue to incur operating losses in
the future and to make capital expenditures to expand our research and
development programs (including upgrading our CNS Database) and to scale up our
commercial operations and marketing efforts. We expect that our existing cash
will be used to fund working capital and for capital expenditures and other
general corporate purposes, including the repayment of debt incurred as a result
of our litigation with Brandt. Although we
recently received net proceeds of $3.13 million on December 24, 2009, December
31, 2009, and January 4, 2010 upon the second, third and fourth closings of our
private placement, we anticipate that our cash on hand (including the proceeds
received from such closings) and cash generated through our operations will not
be sufficient to fund our operations for at least the next 12 months. We
therefore anticipate raising additional funds in the future.
The
amount of capital we will need to conduct our operations and the time at which
we will require such capital may vary significantly depending upon a number of
factors, such as:
|
·
|
the
amount and timing of costs we incur in connection with our research and
product development activities, including enhancements to our CNS Database
and costs we incur to further validate the efficacy of our rEEG
technology;
|
|
·
|
the
amount and timing of costs we incur in connection with the expansion of
our commercial operations, including our selling and marketing
efforts;
|
|
·
|
whether
we incur significant additional legal fees in our litigation with Brandt
in relation to his pending counterclaims in the United States District
Court or his appeals pending with the Supreme Court of the State of
Delaware; and
|
|
·
|
if
we expand our business by acquiring or investing in complimentary
businesses.
|
We have
no off-balance sheet arrangements or financing activities with special purpose
entities.
34
BUSINESS
With
respect to this discussion, the terms “we” “us” “our” “CNS” and the “Company”
refer to CNS Response, Inc., a Delaware corporation and its wholly-owned
subsidiaries CNS Response, Inc., a California corporation (“CNS California”),
Colorado CNS Response, Inc., a Colorado corporation (“CNS Colorado”) and
Neuro-Therapy Clinic, Inc., a Colorado professional medical corporation and a
wholly-owned subsidiary of CNS Colorado (“NTC”).
Background
CNS
Response, Inc. was incorporated in Delaware on July 10, 1984, under the name
Mammon Oil & Gas, Inc. Prior to January 16, 2007, CNS Response, Inc. (then
called Strativation, Inc.) existed as a “shell company” with nominal assets
whose sole business was to identify, evaluate and investigate various companies
to acquire or with which to merge. On January 16, 2007, we entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with CNS Response, Inc., a
California corporation formed on January 11, 2000 (“CNS California”), and CNS
Merger Corporation, a California corporation and our wholly-owned subsidiary
(“MergerCo”) pursuant to which we agreed to acquire CNS California in a merger
transaction wherein MergerCo would merge with and into CNS California, with CNS
California being the surviving corporation (the “Merger”). On March 7, 2007, the
Merger closed, CNS California became our wholly-owned subsidiary, and on the
same date we changed our corporate name from Strativation, Inc. to CNS Response,
Inc. Simultaneous with the closing of the Merger, we received gross proceeds of
approximately $7.0 million from the first closing of a private placement
transaction with institutional investors and other high net worth individuals.
On May 16, 2007, we completed a second closing of the private placement which
resulted in $797,300 of additional gross proceeds to us. After commissions and
expenses, we received net proceeds of approximately $6.7 million in the private
placement.
Overview
CNS
Response is a life sciences company with two distinct business segments. Our
Laboratory Information Services business operated by CNS California, which we
consider our primary business, is focused on the research, development, and
commercialization of a patented system that guides psychiatrists and other
physicians/prescribers to determine a proper treatment for patients with
behavioral (psychiatric and/or addictive) disorders. Our Clinical Services
business operated by NTC is a full service psychiatric clinic.
Laboratory
Information Services
Traditionally,
prescription of medication for the treatment of behavioral disorders (such as
depression, bipolar disorders, eating disorders, addiction, anxiety disorders,
ADHD and schizophrenia) has been primarily based on symptomatic factors, while
the underlying physiology and pathology of the disorder is rarely able to be
analyzed, often resulting in multiple ineffective, costly, and often lengthy,
courses of treatment before effective medications are identified. Some patients
never find effective medications.
We
believe that our technology offers an improvement upon traditional methods for
determining a course of medication for patients suffering from nonpsychotic
behavioral disorders because our technology is designed to correlate the success
of courses of medication, with the neurophysiological characteristics of a
particular patient. Our technology provides medical professionals with
medication sensitivity data for a subject patient based upon the identification
and correlation of treatment outcome information from other patients with
similar neurophysiologic characteristics. This treatment outcome information is
contained in a proprietary outcomes database that consists of over 17,000
medication trials for patients with psychiatric or addictive problems (the “
CNS Database ”). For
each patient in the CNS Database, we have compiled electroencephalographic (“
EEG ”) scans, symptoms
and outcomes often across multiple treatments from multiple psychiatrists and
physicians. This patented technology, called “Referenced-EEG®” or “rEEG®”
represents an innovative approach to identifying effective medications for
patients suffering from debilitating behavioral disorders.
35
With
rEEG®, physicians order a digital EEG for a patient, which is then evaluated
with reference to the CNS Database. By providing this reference correlation, an
attending physician can choose a treatment strategy with the knowledge of how
other patients having similar brain function have previously responded to a
myriad of treatment alternatives. Analysis of this complete data set yielded a
platform of 74 quantitative biomarkers that have shown utility in characterizing
patient response to diverse medications. This platform then allows a new patient
to be characterized, based on these 74 biomarkers, and the database to be
queried to understand the statistical probability of how patients with similar
brain patterns have previously responded to the medications currently in the
database. This technology allows us to create and provide simple reports (“
rEEG Reports ”) to the
prescriber that summarizes historical treatment success of specific medications
for those patients with similar brain patterns. It provides neither a diagnosis
nor specific treatment, but like all lab results, objective, evidenced-based
information to help the prescriber in their decision-making.
Our
Laboratory Information Services business is focused on increasing the demand for
our rEEG Reports. We believe the key factors that will drive broader adoption of
our rEEG Reports will be acceptance by healthcare providers and patients of
their benefit, demonstration of the cost-effectiveness of using our technology,
reimbursement by third-party payers, expansion of our sales force and increased
marketing efforts.
In
addition to its utility in providing psychiatrists and other
physicians/prescribers with medication sensitivity guidance, rEEG provides us
with significant opportunities in the area of pharmaceutical development. rEEG,
in combination with the information contained in the CNS Database, has the
potential to be able to identify novel uses for neuropsychiatric medications
currently on the market and in late stages of clinical development, as well as
aid in the identification of neurophysiologic characteristics of clinical
subjects that may be successfully treated with neuropsychiatric medications in
the clinical testing stage. We intend to enter into relationships with
established drug and biotechnology companies to further explore these
opportunities, although no relationships are currently contemplated. The
development of biomarkers as the new method for identifying the correct patient
population to research is being encouraged by both The National Institute of
Mental Health (NIMH) and The Food and Drug Administration (FDA).
Clinical
Services
In
January 2008, we acquired our largest customer, NTC, located in Colorado. Upon
the completion of the transaction, NTC became our wholly-owned subsidiary. At
the time, NTC operated one of the largest psychiatric medication management
practices in the state of Colorado, under contracts with national health plans.
Daniel A. Hoffman, M.D. is the medical director at NTC, and, after the
acquisition, became our Chief Medical Officer and more recently, our
President.
NTC,
having performed a significant number of rEEG’s, serves as an important resource
in our product development, the expansion of our CNS Database, production system
development and implementation, along with the integration of our rEEG services
into a medical practice. Through NTC, we also expect to successfully develop
marketing and patient acquisition strategies for our Laboratory Information
Services business. Specifically, NTC is learning how to best communicate the
advantages of rEEG to patients and referring physicians in the local market. We
will share this knowledge and develop communication programs which can be
generalized to physicians using our services throughout the country, which we
believe will help drive market acceptance of our services. In addition, we plan
to use NTC to train practitioners across the country in the uses of rEEG
technology.
36
We view
our Clinical Services business as secondary to our Laboratory Information
Services business, and we have no current plans to significantly expand this
business.
Laboratory
Information Services
The
Challenge and the Opportunity
The
1990’s were known as “the Decade of the Brain,” a period in which basic
neuroscience yielded major advances in drug discovery and neurotherapy. Several
trends have emerged which may propel significant adoption of these advances over
the next decade:
|
·
|
Comparative
Effectiveness Research is incorporated into the Obama health plan. The
cost to treat Americans under care for depression and other mental
illnesses rose by nearly two-thirds from $35 billion to $58 billion in the
last 10 years, according to a recent report from the Agency for Healthcare
Research and Quality. Finding more cost-effective treatment modalities in
mental disorders will be critical to successful health care
reform;
|
|
·
|
Mental
Health Parity Act (Parity Act) requires payers, beginning in 2010, to pay
for behavioral medications and treatments using the same standards for
evidence and coverage as they currently use for medical/surgical
treatments;
|
|
·
|
According
to a recent RAND report, 275,000 returning military personnel from the
Iraq and Afghanistan theatres suffer from Major Depression, Post Traumatic
Stress Disorder (PTSD), traumatic brain injury;
and
|
|
·
|
Consumers
have emerged as active decision makers in behavioral treatment, driven by
over $4.8 billion in annual Pharma direct-to-consumer advertising and the
internet. At the same time, media costs for reaching those consumers are
at historic lows.
|
Today,
there are over 100 prescription drugs available to patients suffering from a
behavioral disorder, representing one of the largest and fastest-growing drug
classes. Unfortunately, psychotropic drugs often do not work, or lose their
effect over time, and over 17 million Americans who have failed two or more
medication treatments are now considered “treatment resistant”. For these
patients, the conventional “trial and error” method of prescribing psychotropic
drugs has resulted in low efficacy, high relapse and treatment discontinuation
rates, significant patient suffering and billions in additional cost to
payers.
We
believe we are the first company to create a biomarker database that correlates a
patient’s response to major drug classes and specific medications with their
individual brain physiology. We developed this tool to improve pharmacotherapy
outcomes, particularly in treatment resistant patients, a particularly expensive
patient population with profound unmet clinical needs. Our rEEG technology has
been used by physicians to guide prescribing in behavioral disorders such as
depression, anxiety, anorexia, OCD, bipolar, ADHD, addiction and
others.
rEEG® was
developed by a pathologist/psychiatrist who recognized that correlation of a
patient’s unique brain patterns to known long-term medication outcomes in
similar patients might significantly improve therapeutic performance. This
approach — commonly referred to as Personalized Medicine, and exemplified by
biomarker companies such as Genomic Health (GHDX) — is in the process of
transforming both clinical practice and the pharmaceutical industry. CNS
Response brings this science to behavioral medicine, where the unmet clinical
need is well-documented, expensive, and growing.
37
The
rEEG® Method
rEEG®
Reports are offered as a service, much like a reference lab, in which standard
electroencephalogram (EEG) readings are referenced to a biomarker database to
suggest patient-specific probabilities of response to different
medications. EEG recording devices are widely available, inexpensive
to lease, and are available in most cities by independent mobile EEG
providers.
The
service works as follows:
|
·
|
Patients
are directed to a national rEEG® provider, who performs a standard digital
EEG.
|
|
·
|
EEG
data is uploaded over the web to our central analytical
laboratory.
|
|
·
|
We
analyze the data against the CNS Database for patients with similar brain
patterns.
|
|
·
|
We
provide a report describing the probability of patient success with
different medication options (much like an antibiotic sensitivity report
commonly used in medicine).
|
|
·
|
The
rEEG® Report is sent back to the doctor, typically the next
day.
|
Treatment
Decisions Made by Licensed Professionals
With the
exception of our subsidiary, the Neuro-Therapy Clinic based in Denver, CO, we do
not currently operate our own healthcare facilities, employ our own treating
physicians or provide medical advice or treatment to patients. Physicians who
contract for our rEEG Reports own their own facilities or professional licenses,
and control and are responsible for the clinical activities provided on their
premises. Patients receive medical care in accordance with orders from their
attending physicians or providers. Physicians who contract for rEEG Reports are
responsible for exercising their independent medical judgment in determining the
specific application of the information contained in the rEEG Reports, and the
appropriate course of care for each patient. Following the prescription of any
medication, Physicians are presumed to administer and provide continuing care
treatment.
Estimated
Market for rEEG Reports
Currently,
the wholesale (direct to physician) price for standard rEEG testing is $400 per
test, and the retail (payer and consumer) price is approximately
$800. Thus far, payments have typically been from psychiatrists whose
patients pay privately for the rEEG® Report. The National Institute
of Mental Health (NIMH) estimates that only 12.7% of patients get minimally
effective treatment, with over 17 million Americans now classified as “treatment
resistant”, meaning they’ve failed to find relief after trying two or more
medications.
We
therefore estimate the potential market for our rEEG Reports at $1.7 billion
annually, based on an addressable market of 17 million Treatment Resistant
patients, with only 12.5% of patients seeking care and complying with
treatment. Now that we have completed our clinical trial (please see
page 42 Laboratory Services Accomplishments for further information on our
clinical trial), we intend to place greater emphasis on the marketing of our
rEEG technology to physicians, consumers and payers.
38
Path
to Adoption
Several
biomarker firms have successfully commercialized products that predict
medication response, including Genomic Health’s OncotypeDx which predicts
response to chemotherapy, and Roche/Affymetrix Cytochrome P450 test which shows
how each patient is likely to metabolize a given antidepressant. We
are following the paths to adoption used by these successful biomarker firms by
focusing on growth in three stages:
(1)
Private pay market.
Consumers
and private-pay psychiatrists drive over 33% of the market for psychiatric
visits, and a significant proportion of all licensed psychiatrists now describe
themselves as private pay only. We believe consumers who have
experienced treatment failure will seek out our network of physicians once they
become aware of the successful outcomes demonstrated in our clinical
trial.
During
2008, the recruiting for our Depression Efficacy Trial (the Depression Efficacy
Trial is further described under the heading Laboratory Services Accomplishments
on page 42) generated many important lessons about integrated marketing for our
rEEG® service. By using a media mix of web, radio and TV, interested
patients were delivered into the trial at an average cost of $40-$68 per
contact. We will continue to pursue integrated consumer marketing as
a means to introduce interested patients to our rEEG® provider
network.
To drive
growth in private pay, consumer-driven rEEG testing, we plan to do the
following:
·
|
Grow
our focused physician network: We currently have 51 active practicing
physicians utilizing rEEG in their practices, defined as having paid for
testing within the last 12 months. An additional 52 physicians are
currently involved in training or clinical trials utilizing rEEG.
Physicians who become “power users” (which we define as physicians who
conduct several tests per month) report significantly better results than
casual users of rEEG technology, and have certain economies of scale in
using the test in their practices. Similar to the adoption of LASIK
technology in consumer-driven opthalmology, successful practices using
rEEG have reported that as their word-of-mouth referrals increase, their
procedure billings increase, and their average patient visits decrease (as
patients improve). Accordingly, their patient turnover may increase over
time, requiring additional marketing efforts to grow their practice
volume.
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|
We plan to focus on supporting these power users through direct marketing, clinical practice support (patient intake, scheduling, washout support and reporting), and technical support. This focused network approach has been successful in other specialties (for example, in organ transplant networks and in disease management) because it is easier to sell to payers, facilitates data collection, and is more cost-effective in delivering care even at higher provider margins. |
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·
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Increase
unit pricing: Currently, the wholesale (direct-to-physician)
price for standard rEEG testing is $400 per test, and the retail (payer
and consumer) is approximately $800. We anticipate that
our pricing will be increased over time with greater acceptance of the
test as a standard of care, rewarding power users for committed volume and
affording improvement in test margins
overall.
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39
|
·
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Utilize
our product laboratory: In 2008, we purchased the psychiatric
clinic in Denver, CO founded by our Chief Medical Officer, Daniel Hoffman,
MD. The clinic currently serves as a platform for perfecting
rEEG workflow, information systems, product development and
research. We also test local marketing strategies in Denver
which can then be generalized to other rEEG® network
clinics. The Denver clinic may ultimately become a national
Center of Excellence for neuropsychiatry, where insurers may direct
certain treatment-resistant
patients.
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|
·
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Scalable
platform for delivery: During 2008, significant development
effort was focused on production systems and lab infrastructure to
accommodate potential growth in the production volume of our rEEG
Reports. Our current production application is able to
accommodate up to 100 tests per day without additional
manpower. In addition to providing scalable capacity, the
production system provides for online delivery of tests and delivery of
test data to physicians’ desktops. Currently, we are investing
in projects to reduce or eliminate the remaining manual processes in test
production: “artifacting” of EEG data and Neurologist review of
each case. It is estimated that these processes will, over
time, be replaced with validated algorithms and/or post-facto sampling for
quality assurance.
|
(2) Payer
economic trials.
Health
plans currently spend over $30 billion on psychotropic medications each year
according to the Substance Abuse and Mental Health Services Administration
(SAMHSA), and most are aware that these agents only work on about 30% of
patients who take them. The lack of medication adherence and poor
treatment outcomes in behavioral health have been longstanding issues for
payers, but they’ve lacked a targeted, cost-efficient approach to solve the
problem.
Presently,
rEEG is not a reimbursable procedure for most health care
payers. Initially, payer response to most new technologies
is a reflexive denial of coverage, regardless of the superiority of evidence or
economics. Over time, however, certain payers may adopt technologies
which confer a clear marketing or underwriting advantage, or which protect them
from legal claims for reimbursement under new legislation (e.g.
Parity). Because of this, it is possible that with sufficient
marketing efforts, we may shift payer “fear of adoption” to “fear of not
adopting” and increase the number of payers that approve our rEEG Reports as a
reimbursable expense.
We intend
to prove that our rEEG Reports are a compelling value for payers through
independent research, budget impact models, and payer pilots (economic
trials):
|
·
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Evidence for payers:
We will share well-designed research on rEEG® efficacy,
showing the weight of superior evidence in controlled and real-world
clinical trials and case series.
|
For
example, in 2008, the Center for Health Economics, Epidemiology, and
Science Policy of United BioSource evaluated current evidence supporting
the utility of rEEG® in guiding treatment of treatment-resistant
depression vs. other guidelines commonly used by insurance companies and
managed care payers. They reported:
“Referenced-EEG®
was associated with relatively high remission rates in Treatment Resistant
Depression with reasonable levels of evidence. ... In
conclusion, the evidence supporting rEEG® appears superior
to that supporting American Psychiatric Association (APA) or Texas
Medication Algorithm Project (TMAP) treatment guidelines for TRD and
certainly the results of the Sequenced Treatment Alternatives to Relieve
Depression (STAR*D) Level 3 and Level 4 studies that are commonly used by
payers.”
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40
·
|
Parity: In 2010, Mental
Health Parity Act (Parity Act) will change all payers’ coverage criteria,
requiring equal coverage for behavioral and medical therapies, using the
same coverage criteria and evidence. Milliman Global Actuarial Services
estimates a 1-3% increase in overall health costs resulting from a
significant increase in behavioral health expenditures driven by the
Parity Act. Of particular interest to us, however, is the specific
language in the Parity Act which requires that coverage of a
scope-of-service for one type of diagnosis (for example: a Neurologist
performing a diagnostic EEG for Epilepsy) be applied equally as the use of
an EEG by a Psychiatrist for medication
management.
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|
·
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Budget Impact Model:
A Budget Impact Model for rEEG® has been developed by
Analysis Group Economics based on the published research of Kessler,
Russell, and others covering the cost of treatment failure in mental
disorders. Modeling the economic impact of rEEG® in a health
plan with five million members, we estimate that full utilization of rEEG®
in treatment-resistant depression, anxiety, bipolar and ADHD could save
$8,500 per treatment resistant member for a savings of $45 million per
year.
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·
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Economic Trials:
Economic Trials are intended to demonstrate the comparative effectiveness
of rEEG versus prevailing Trial & Error medication management through
pilot programs within a payer’s own population. Although no
payer is currently reimbursing physicians for the use of rEEG technology,
we are currently negotiating pilot programs for reimbursement coverage
with several of the nation’s largest payers, representing over 80 million
covered lives.
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One
example of the payer appeal was outlined in an advisory issued last year by the
actuarial firm Milliman Global:
“One
innovative company has come up with an interesting method to help doctors treat
patients who have previously been defined as treatment-resistant. Instead of
using the trial and error method to find an appropriate medication for these
patients, a form of digital electroencephalography (EEG) is used to identify
abnormal patient physiology. The results of this EEG are then used in
combination with a database containing over 1,600 patients and 13,000 medication
trials to select the most efficacious drug(s). Initial outcomes indicate a high
success rate (75%) for participants in this program.
Quality
initiatives to increase effective treatment of behavioral disorders with
psychotropic drugs will result in preferred outcomes for all involved. If
patients are using the "correct" drug and doing so in accordance with
established medical guidelines, their all around health will improve. Payers who
implement similar quality initiatives will also benefit by getting greater value
in their healthcare spending, and hopefully, reducing total healthcare costs
down the road as members get healthier and stay healthier. Even
employers will benefit with reduced healthcare costs, fewer sick days and
disability days, and increased productivity.”
Milliman
Global Client Advisory, August 2008.
(3) Full
payer coverage.
Full
reimbursement of referenced-EEG is likely to follow successful
direct-to-consumer adoption of the rEEG test, along with continued release of
confirmatory rEEG research in peer-reviewed publications. Following
the example of the biomarker firms discussed above, it appears possible to
accelerate the effect of these initiatives in the following ways:
41
|
·
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Patient Advocacy:
we believe that some components of the rEEG test may be
billable to payers under Mental Health Parity
Act. Historically, patients of our physician network providers,
and those in our own clinic in Colorado, have paid out of pocket for rEEG
testing and then sought reimbursement from their insurance
carrier. Although these providers frequently furnish
information to support these claims, the success of their prosecution by
patients is unclear.
|
Accordingly, we intend to follow the example of biomarker firms such as Genomic Health, which developed Patient Advocacy services where patient claims were documented and tracked, and the company helped organize the advocacy of each claim with third party payers. Using this approach, Genomic Health was able to win a retrospective reversal of claim denials for its test from Medicare (the Centers for Medicare and Medicaid Services) in 2006. |
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·
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Guideline development :
we intend to continue internal and externally-sponsored
clinical research to prove the efficacy of our technology to professional
associations, such as the American Psychiatric Association. We
believe that with strong clinical results, professional associations may
endorse rEEG in their treatment guidelines, which may drive full payer
coverage.
|
We also
believe that the inclusion of historical and new rEEG research in Comparative
Effectiveness studies conducted under the Agency for Healthcare Research and
Quality (AHRQ) would be a significant milestone. As a consequence of
this recent focus on cost-effective treatment, an unprecedented level of funding
has been made available under the Economic Recovery Act, the budgets for NIH and
AHRQ, and earmarked budgets for Defense and the Veterans Association
(VA). We intend to pursue research opportunities with several
external sponsors of research, including:
|
·
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the
National Institutes of
Mental Health, focusing on the cost-effectiveness of rEEG as a more
deployable version of brain imaging to guide
prescribing;
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·
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the
Department of Defense and
the Veterans Administration, to address the potential for rEEG in
treating returning soldiers with PTSD and Major Depression;
and
|
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·
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the
Centers for Medicare and
Medicaid Services (CMS), as a mechanism for improving quality and
cost performance in programs that spend billions on psychotropic
medications.
|
Laboratory
Services Accomplishments
Over the
last few years, we have been primarily focused on proving the efficacy of
rEEG-guided treatments through multiple clinical trials. The largest
of these — the Depression Efficacy Trial — was a multi-center, randomized,
parallel controlled trial completed in 2009 at 12 medical centers,
including Harvard, Stanford, Cornell, UCI and Rush. The study began
in late 2007 and was completed in September 2009, screening 465 potential
subjects with Treatment Resistant Depression and ultimately randomizing 114
participants to a 12-week course of treatment utilizing rEEG in the experimental
group, and a modified STAR*D algorithm in the control group (STAR*D, or
Sequenced Alternatives to Relieve Depression, was a large, seven-year study
sponsored by the National Institute of Mental Health and completed in
2006). Top-line results were consistent with previous clinical
trials of rEEG:
|
·
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The
study found that rEEG significantly outperformed the modified STAR*D
treatment algorithm from the beginning. The difference, or
separation, between rEEG and the STAR*D control group was 50 and 100
percent for the study’s two primary endpoints. By
contrast, separation between a new treatment and a control group often
averages less than 10 percent in antidepressant
studies. Interestingly, separation was achieved early (week 2)
and durable, continuing to grow through week
12.
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42
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·
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The
control group in this case, STAR*D, was a particularly tough comparator,
representing a level of evidence-based depression care that is available
to only 10% of the US population, according to one of the study’s
authors.
|
|
·
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Statistical
significance (p < .05) was achieved on all primary and most secondary
endpoints.
|
In the
course of undertaking the study, we also gained insights into marketing of the
rEEG technology, highlighting aspects of marketing which proved to be more
successful than others. Furthermore, we also developed a foundation
for commercialization of the rEEG technology with insurance companies, and
signing a payer group, Cal Optima (a Southern California health plan for
Medicare/Medicaid enrollees), to run a pilot study with us. A second
large insurer is in the process of negotiating a pilot
study. Additionally, over the course of the last few years, much time
has been spent securing sufficient financing to continue our operations and
ensure that the clinical trial was completed.
Going
forward, we plan to continue expanding the CNS Database with the addition of
more pharmaceuticals and their respective outcomes. Additionally, we
plan on improving the functionality and clinical utility of our rEEG Reports, in
order to improve adoption and compress the training period necessary for
physicians to become proficient with the report. Finally, we plan to
increase and refine our marketing efforts to consumers and psychiatrists, and
expand our effort to obtain regular insurance reimbursement for rEEG-guided
therapies.
Use
of rEEG Technology in Pharmaceutical Development
In
addition to its utility in providing psychiatrists and other physicians with
medication sensitivity guidance, rEEG provides us with significant opportunities
in the area of pharmaceutical development. In the future, we aim to
use our propriety data and processes to advance central nervous system (CNS)
pharmaceutical development and economics, in one or more of the following
ways:
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Enrichment :
selecting patients for clinical trial who not only have the symptoms
of interest, but are shown by rEEG® screening to likely respond to the
developer’s drug. An oft-cited example is the antidepressant
Prozac, which failed several clinical trials before it achieved success in
two separate trials. The ability to design trials in which
exclusion criteria identify and exclude patients who are clearly
resistant, as determined by rEEG, has the potential to sharpen patient
focus and productivity in clinical trials of psychotropic
medications.
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·
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Repositioning : rEEG®
may suggest new applications/indications of existing
medications. For example, Selective Serotonin Reuptake
Inhibitors Antidepressants (SSRI’s) are now commonly given by primary care
physicians for depression and other complaints, but often produce unwanted
side effects or inadequate results. The ability to biomarker
patients who respond better to tricyclics (TCA’s), or combinations of
TCA’s and stimulants, offers the potential for new indications for
existing compounds.
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|
·
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Salvage :
resuscitation of medications that failed phase II or III
studies. One example of this opportunity is
Sanofi-Aventis’ unsuccessful PMA filing for Rimonabant, a
promising anti-obesity/cardiometabolic compound which was
denied approval in the U.S. due to CNS side-effects in their clinical
trial populations. Being able to screen out trial participants
with resistance to a certain medication is an application for rEEG, and
could create “theranostic” products (where an indication for use is
combined with rEEG) for compounds which have failed to receive
broader approval.
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43
|
·
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New Combinations :
unwanted adverse effects occur with medications in fields from
cancer to hepatitis. The ability to improve these medications, in
combination with psychotropics, may improve safety, compliance, and,
sometimes, patient outcomes.
|
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·
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Decision Support :
improved understanding supports improved decision making at
all levels of pharmaceutical
development.
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Competition
Comparable
Biomarker Companies
Although
there are no companies offering a service directly comparable to rEEG, the
following companies might be noted as pursuing similar strategies:
|
·
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GENOMIC
HEALTH (Nasdaq: GHDX) Genomic Health, Inc. is a life science
company focused on the development and commercialization of genomic-based
clinical laboratory services for cancer that allow physicians and patients
to make individualized treatment decisions. The company was founded in
2000 and is based in Redwood City, California. In 2004, the
company launched the Oncotype DX breast cancer test, which has been shown
to predict the likelihood of chemotherapy benefit, as well as recurrence
in early-stage breast cancer. By the end of 2008, the company
reported that over 90% of health plans were reimbursing use of this
test. In addition to its adopted Oncotype DX breast cancer
test, Genomic Health is preparing to launch its Oncotype DX colon cancer
test in early 2010.
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·
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ASPECT
MEDICAL SYSTEMS, INC. (Nasdaq: ASPM), an EEG anesthesia monitoring
company, is developing a specific EEG measurement system that indicates a
patient's likely response to some antidepressant medications. Its
biomarker, based on research from the UCLA Neuropsychiatric Institute, is
called Cordance.
|
A
375-subject multi-site clinical trial on the efficacy of this biomarker in
guiding treatment of treatment resistant depression — the BRITE trial —
demonstrated positive predictive outcomes for a single antidepressant,
escitalopram (Lexapro). Patients in the trial were measured prior to and after
taking medication. Publicly available data suggests that the technology may
validate a patient's treatment but does not guide specific treatment. Initial
trials have shown efficacy in correlating a patient's ultimate response to
antidepressants. The revenue model may involve sale of equipment and a
per-patient charge, but the company does not currently appear to be close to a
commercial release of its product. The company is now conducting
trials.
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·
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BRAIN
RESOURCE COMPANY (Aust: BRRZF) (www.brainresource.com), is an Australian
Clinical Research Organization (CRO) and biomarker company focused on
personalized medicine solutions for patients, clinicians, pharmaceutical
trials and discovery research. As a CRO, its main focus has
been iSPOT, an $18 million international biomarker study with a private
biotechnology company. Their revenue model includes physician
services and sale of systems and services to pharmaceutical development
companies in the CNS discovery field. As a biomarker provider,
it signed a $6 million agreement last year with Optum (United Healthcare)
to provide screening for plan
members.
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44
We
believe that we have a competitive advantage with respect to the behavioral
biomarker firms such as Aspect Medical or Brain Resource Company as we offer
more comprehensive testing (e.g. to cover the full range of CNS medications, not
just certain antidepressants in the case of Aspect Medical) and have conducted
studies to validate the efficacy of our service. We also believe that
we offer greater clinical utility (ease of use, rapid results) in day-to-day
clinical practice than our competitors.
Emerging
Medical Device Technologies
The field
of neuropsychiatry is undergoing dramatic change as a result of the introduction
of new technologies. Many of these technologies are focused on the same
treatment-resistant patient populations which are the focus of rEEG, and are
priced from $10,000 to over $50,000 for a full course of treatment. Two of the
three examples presented here are invasive, implantable devices.
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·
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CYBERONICS, INC.
(Nasdaq: CYBX) is a neuromodulation company, engages in the design,
development, manufacture, and marketing of implantable medical devices
that provide vagus nerve stimulation (VNS) therapy for the treatment of
epilepsy and treatment-resistant depression. The VNS therapy system
consists of an implantable generator that delivers an electrical signal to
an implantable lead attached to the left vagus nerve, as well as a bipolar
lead, a programming wand and software, and a tunneling
tool.
|
Cyberonics
has developed an implantable Vagus Nerve Stimulation device approved for
treatment-resistant depression. This device has received pre-market
approval from the Food and Drug Agency for patients and is believed
to be under reimbursement review by insurance payers.
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·
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MEDTRONIC,
INC. (NYSE: MDT). Medtronic has an implantable deep brain stimulation
device (DBS) in development which is similar to their device approved for
Parkinson's treatment. Deep brain stimulation uses an implanted electrode
– essentially a pacemaker for the brain — to deliver electrical
stimulation to specific structures within the brain. The Food and Drug
Administration (FDA) approved DBS as a treatment for essential tremor in
1997, for Parkinson's disease in 2002, and dystonia in 2003. DBS is also
routinely used to treat chronic pain and has been used to treat various
affective disorders, including major depression. While DBS has proven
helpful for some patients, there is potential for serious complications
and side effects.
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·
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NEURONETICS
(Privately held) (www.neuronetics.com). Neuronetics has
pioneered and refined the NeuroStar TMS Therapy system for non-invasive,
non-systemic treatment for depression using a focused, pulsed magnetic
field to stimulate function in targeted brain
regions. NeuroStar TMS Therapy stimulates nerve cells in an
area of the brain that is linked to depression by delivering highly
focused MRI-strength magnetic field
pulses.
|
TMS is
performed in a physician's office with each treatment lasting about 40 minutes
daily for four to six weeks. In an open-label clinical trial, which
is most like real world clinical practice, approximately one in two patients
experienced significant improvement in symptoms, and one in three experienced
complete symptom resolution. NeuroStar TMS Therapy was cleared by the FDA in
October 2008 for patients who have not adequately benefited from prior
antidepressant medication. TMS Therapy is currently available at over 25
treatment locations in 15 states.
From a
competitive standpoint, we view these emerging treatment options as expensive
augmentations to existing therapies for treatment-resistant patients, and as
competitive therapeutic options to medications. To the best of our knowledge,
rEEG-guided therapy provides a higher probability of treatment success at a
significantly lower cost than device-based solutions, which gives us a
competitive advantage in the marketplace.
45
Intellectual
Property
rEEG
Patents
We have
three issued U.S. Patents which we believe provide us with the right to exclude
others from using our rEEG technology. In addition, we believe these
patents cover the analytical methodology we use with any form of neurophysiology
measurement including SPECT (Single Photon Emission Computed Tomography), fMRI
(Functional Magnetic Resonance Imaging), PET (Positron Emission Tomography), CAT
(Computerized Axial Tomography), and MEG
(Magnetoencephalography)). We do not currently have data on the
utility of such alternate measurements, but we believe they may, in the future,
prove to be useful to guide therapy in a manner similar to rEEG. We
have also filed patent applications for our technology in various foreign
jurisdictions, and have issued patents in Australia and Israel.
rEEG
Trademarks
“Referenced-EEG”
and “rEEG” are registered trademarks of CNS California in the United
States. We will continue to expand our brand names and our
proprietary trademarks worldwide as our operations expand.
CNS
Database
The CNS
Database consists of over 17,000 medication trials across over 2,000 patients
who had psychiatric or addictive problems. The CNS Database is maintained in two
parts:
1. The
QEEG Database
The QEEG
Database includes EEG recordings and neurometric data derived from analysis of
these recordings. This data is collectively known as the QEEG Data.
QEEG or “Quantitative EEG” is a standard measure that adds modern computer and
statistical analyses to traditional EEG studies. The Company utilizes
two separate, FDA-approved external QEEG databases which provide statistical and
normative information in the rEEG process.
2. The
Clinical Outcomes Database
The
Clinical Outcomes Database consists of physician provided assessments of the
clinical long-term outcomes (average of 405 days) of patients and their
associated medications. The clinical outcomes of patients are recorded using an
industry-standard outcome rating scale, the Clinical Global Impression Global
Improvement scale (“CGI-I”). The CGI-I requires a clinician to rate
how much the patient's illness has improved or worsened relative to a baseline
state. A patient's illness is compared to change over time and rated as: very
much improved, much improved, minimally improved, no change, minimally worse,
much worse, or very much worse.
The
format of the data is standardized and that standard is enforced at the time of
capture by a software application. Outcome data is input into the
database by the treating physician or in some cases, their office
staff. Each Physician has access to his/her own patient data through
the software tool that captures clinical outcome data.
46
We
consider the information contained in the CNS Database to be a valuable trade
secret and are diligent about protecting such information. The CNS
Database is stored on a secure server and only a limited number of employees
have access to it.
Research
and Development
In 2010,
we plan to continue to enhance, refine and improve the accuracy of our CNS
Database and rEEG through expansion of the number of medications covered by our
rEEG Reports, expansion of our biomarkers, refinement of our biomarker system,
and by reducing the time to turnaround a report to the physician.
Government
Regulation
We do not
believe that sales of our Laboratory Information Services, including our rEEG
Reports, are subject to regulatory pre-market approval. However, on April 10,
2008 we received a “warning letter” from the FDA in which the FDA indicated it
believed, based in part on the combination of certain marketing statements it
read on our website, together with the delivery of our rEEG Reports, that we
were selling a software product to aid in diagnosis, which constituted a
“medical device” requiring pre-market approval or clearance by the FDA pursuant
to the Federal Food, Drug and Cosmetic Act (the "Act"). We responded to the FDA
on April 24, 2008 indicating that we believed it had incorrectly understood our
product offering, and clarified that the Laboratory Information Services
were not diagnostic and thus did not constitute a medical device. On
December 14, 2008, the FDA again contacted us and indicated that, based upon its
review of our description of our intended use of the rEEG Reports on our
website, it continued to maintain that the rEEG Reports met its definition of
medical devices. In response to of the FDA communications, we made a number of
changes to our website and other marketing documents to reflect that rEEG is a
service to aid in medication selection and is not a
diagnosis aid. On September 4, 2009, through our
regulatory counsel, we responded to the December 14, 2008 FDA letter explaining
our position in more detail.
On
December 28, 2009, the Company and Regulatory counsel received a response from
the FDA indicating that it still believes referenced-EEG constitutes a “medical
device” under the Act. In response to the most recent letter, we will
request a meeting with FDA to discuss the scope of and requirements
for 510(k) clearance, that they might require, if any. In any
event, we will continue our ongoing dialogue with the FDA regarding our
Laboratory Information Services, and we will take all action necessary and
appropriate to support our position.
We cannot
provide any assurance that additional FDA regulation, including PMA, will not be
required in the future for referenced-EEG. It is also possible that
legislation will be enacted into law and may result in increased regulatory
burdens for us to continue to offer referenced-EEG testing.
If
pre-market review is required, our business could be negatively impacted until
such review is completed and clearance to market or approval is obtained, and
FDA could require that we stop selling our test pending pre-market clearance or
approval. If our test is allowed to remain on the market but there is
uncertainty about our test, if it is labeled investigational by FDA, or if
labeling claims FDA allows us to make are very limited, orders may decline. The
regulatory approval process may involve, among other things, successfully
completing additional clinical trials and submitting a pre-market clearance
notice or filing a PMA application with the FDA. If pre-market review
is required by FDA, there can be no assurance that our test will be cleared
or approved on a timely basis, if at all. Ongoing compliance
with FDA regulations would increase the cost of conducting our business, and
subject us to inspection by FDA and to the requirements of FDA and penalties for
failure to comply with these requirements.
47
Even if
the sale of our Laboratory Information Services are not subject to regulatory
approval, federal and state laws and regulations relating to the sale of our
Laboratory Information Services are subject to future changes, as are
administrative interpretations of regulatory agencies. In the event that we do
not resolve the status of our Laboratory Information Services with the FDA, or
in the event that federal and state laws and regulations change, we may need to
incur additional costs to seek government approvals for the sale of our
Laboratory Information Services.
In the
future, we intend to seek approval for medications or combinations of
medications for new indications, either with corporate partners, or potentially,
on our own. The development and commercialization of medications for new
indications is subject to extensive regulation by the U.S. Federal government,
principally through the FDA and other federal, state and governmental
authorities elsewhere. Prior to marketing any central nervous system medication,
and in many cases prior to being able to successfully partner a central nervous
system medication, we will have to conduct extensive clinical trials at our own
expense to determine safety and efficacy of the indication that we are
pursuing.
Description
of Property
On
January 22, 2010, we moved to our new leased facility for our headquarters and
Laboratory Information Services business, located at 85 Enterprise, Suite
410, Aliso Viejo, California 92656. We entered into a 36 month lease for
the 2,023 square foot facility, which expires on January 31,
2013. The average cost of the lease for the period is $3642 per
month.
We lease
space for our Clinical Services operations under a lease which expires in
February 2010. The facility is approximately 3,500 square feet, and is located
in Denver, Colorado. This lease is currently in the process of being
renegotiated. In addition, we sublease approximately 1,000 square
feet of space at a site adjacent to the primary suite on a month-to-month basis
for our Clinical Services business.
We
believe that our current space is adequate for our needs and that suitable
additional or substitute space will be available to accommodate the foreseeable
expansion of our operations.
Employees
As
January 15, 2010, we had approximately 12 full-time and 6 part-time employees,
and 3 independent contractors. We provide all full-time employees
with medical insurance, dental insurance and paid vacation. We
believe that our relations with our employees are good. None of our
employees belong to a union.
Legal
Proceedings
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the ordinary course of business. Other than as set forth below, we
are not currently party to any legal proceedings, the adverse outcome of which,
in our management’s opinion, individually or in the aggregate, would have a
material adverse effect on our results of operations or financial
position.
Since
June of 2009, we have been involved in litigation against Leonard J. Brandt, a
stockholder, former director and our former Chief Executive Officer (“Brandt”)
in the Delaware Chancery Court and the United States District Court for the
Central District of California. At the conclusion of a two-day
trial that commenced December 1, the Chancery Court entered judgment
for the Company and dismissed with prejudice Brandt's action brought
pursuant to Section 225 of the Delaware General Corporation Law, which sought to
oust the incumbent directors other than Brandt. The Chancery Court thereby
found that the purported special meeting of stockholders convened by Brandt on
September 4, 2009 was not valid and that the directors purportedly elected at
that meeting are not entitled to be seated. On January 4, 2010,
Brandt filed an appeal with the Supreme Court of the State of Delaware in
relation to the case, which the Company believes is without merit and intends to
vigourously defend.
48
The Chancery
Court also denied an injunction sought by Mr. Brandt to prevent the voting
of shares issued by the Company in connection with our bridge financing in
June 2009 and securities offering in August 2009, and dismissed
Brandt's claims regarding those financings and stock issuances.
On January 4, 2010, Brandt also filed an appeal in relation to this ruling with
the Delware Supreme Court which the Company believes is without merit and
intends to vigourously defend.
The
Chancery Court also dismissed with prejudice another action brought by Mr.
Brandt, in which he claimed he had not been provided with information owed to
him.
An action
before the United States District Court for the Central District of California
remains outstanding. We are evaluating our options in connection with
this lawsuit.
The
following is a summary of the litigation proceedings involving the Company and
Brandt:
Delaware
Chancery Court – CNS Response, Inc. v. Leonard Brandt, Meyerlen LLC, EAC
Investment Limited Partnership and "John Does 1-20" (An y CNS Stockholder
Purporting to be Among Holders of Shares Constituting 25% Of the Company's Stock
As Referenced In the June 20, 2009 Notice Of Special Meeting) – C.A. No.
4688-CC
On June
26, 2009, we commenced an action in the Delaware Court of Chancery against
Leonard Brandt and certain other parties in connection with Brandt’s efforts to
seize control of the Company by unseating the incumbent directors (other than
Brandt). In our complaint, we alleged that Brandt’s actions in
connection with his purported special meeting notices and attempts to call and
hold a special meeting violate certain provisions of the Delaware General
Corporation Law (the “DGCL”), and we sought declaratory and injunctive relief to
invalidate a special meeting called by Brandt.
On June
26, 2009, we also moved for issuance of a temporary restraining order against
Brandt’s holding a special meeting. Brandt opposed the motion, and on
June 29 the Chancery Court heard and denied our motion for a temporary
restraining order, on the grounds that we could seek relief from Brandt’s
actions after his special meeting occurred.
On August
12, 2009, Brandt and Defendant MeyerLen, LLC filed an answer and affirmative
defenses to our June 26, 2009 complaint. In addition, Brandt filed a
counterclaim and third-party complaint against us, our other directors,
affiliates of one of the directors, and investors who are not employees,
officers or directors of the Company. In his answer and the
counterclaims and third party claims, Brandt alleged, among other things, that
the other directors acted without authority in connection with his removal as
the CEO in April 2009 and violated their fiduciary duties in connection with
their consideration and approval of certain financings completed by us
subsequent to Brandt’s termination as CEO. Brandt alleged that
certain defendants aided and abetted the directors in their breaches and
wrongful acts. Brandt also asked the court to invalidate certain
bylaw changes adopted by our board of directors.
On August
24, 2009, Brandt filed a motion seeking an injunction against our issuance of
shares of our stock to John Pappajohn or Sail Ventures pursuant to existing
agreements between us and those investors, and against the implementation of our
previously-announced bylaw amendments.
49
On
October 22, 2009, Brandt and Defendant MeyerLen, LLC filed an amended answer and
affirmative defenses to our June 26, 2009 complaint and an amended counterclaim
and third-party complaint against us, our other directors, affiliates of one of
the directors, and investors who are not employees, officers or directors of the
Company. On the same day, Brandt filed an amended motion for a
preliminary injunction, which sought to prevent the voting of shares issued by
the Company in connection with our bridge financings in May and June, 2009
and the securities offering in August, 2009. On the same day, Brandt
moved to expedite proceedings in the action, coordinate discovery with his
Section 225 action described below, and have the motion for a preliminary
injunction argued at the conclusion of the trial of the Section 225
action.
On
October 30, 2009, the Delaware Chancery Court granted the motion to expedite
proceedings in the action, coordinate discovery with his Section 225 action
described below, and have the motion for a preliminary injunction argued at the
conclusion of the trial of the Section 225 action.
On
December 2, 2009, after full briefing, evidentiary submissions, and argument of
the motion for a preliminary injunction, the Chancery Court denied the
injunctive relief sought by Brandt to prevent the voting of shares issued by the
company in connection with our bridge financings in May and June and
securities offering in August. Instead, the Court dismissed
Brandt's counterclaims regarding those financings and stock
issuances. On the same date, the Delaware Chancery Court dismissed the
underlying Section 211 action against Brandt as moot. On January 4,
2010, Brandt filed an appeal with the Supreme Court of the State of Delaware in
relation to the case, which the Company believes is without merit and intends to
vigourously defend.
Delaware
Chancery Court – Leonard J. Brandt v. CNS Response, Inc., C.A. N o,
4773-CC
On July
31, 2009, Brandt filed an action under Section 220 of the DGCL asking the
Chancery Court to require us to provide him with certain books and records,
including stockholder information. On July 31, Brandt also requested
emergency injunctive relief against us compelling us to provide the records
immediately. We opposed the motion. On August 3, 2009 the
Chancery Court heard argument and denied the requested emergency
relief. On August 24, 2009, we answered the complaint and asserted
affirmative defenses to it. On December 2, 2009, the Chancery
Court dismissed Brandt’s action with prejudice.
Purported
September 4 Stockholders Meeting and Subsequent Action Filed by Brandt Under
DGCL 225 — Leonard J. Brandt v. CNS Response, Inc., George Carpenter, Henry T .
Harbin, M.D., David B. Jones, Jerome Vaccaro, M.D., John Pappajohn and Tommy
Thompson, C.A. N o. 4867-CC
Pursuant
to a notice dated August 25, Brandt purported to hold a special meeting of
stockholders on September 4, 2009. In his proxy materials
accompanying the notice, Brandt claimed that the record date for the purported
meeting was August 24. Brandt claimed that a quorum was present and
proceeded to call a vote on his proposal to elect himself and his nominees as
directors. He then claimed that his own shares and the shares for
which he purportedly held proxies were sufficient to elect Brandt and the other
nominees. We took the position that no valid stockholder action was
taken on September 4, that no changes to the board of directors occurred, and
that the election of the company’s directors would occur at the scheduled CNS
annual meeting of stockholders on September 29, 2009. While our bylaws permit
stockholders to call special meetings under certain circumstances, those
meetings (i) require the stockholders wishing to call the meeting to follow
certain procedures that Brandt did not follow and (ii) cannot involve the
election of directors. In addition, Brandt’s purported record date of
August 24 was invalid because our board of directors had already established
August 27 as the record date and, as a result, not all of the stockholders
entitled to vote at his purported meeting were permitted to do so.
On
September 4, Brandt filed an action seeking relief under Section 225 of the DGCL
in the Delaware Court of Chancery against us and our directors George Carpenter,
Henry T. Harbin, M.D., David B. Jones, Jerome Vaccaro, M.D., John Pappajohn and
former Wisconsin Governor Tommy Thompson. Section 225 provides a
statutory mechanism for review of contested elections. Brandt sought to have the
Court declare that his meeting and election were valid.
50
On
September 25, 2009, the Company and its incumbent directors answered the
complaint and asserted affirmative defenses. On September 29, 2009,
the Chancery Court issued a “status quo” order, which maintained the Board of
Directors in place immediately prior to the purported September 4 meeting
(Messrs. Carpenter, Jones, Pappajohn, Thompson and Brandt, and Drs. Harbin and
Vaccaro). The status quo order also placed certain restrictions on
certain corporate actions during the pendency of the Section 225
action.
Later on
September 29, the Company convened its Annual Meeting of Stockholders, which had
been duly noticed earlier in September. At the meeting we submitted
certain matters to a vote of security holders through the solicitation of
proxies. At the meeting, our stockholders elected George Carpenter,
Henry Harbin, M.D., David B. Jones, John Pappajohn, Tommy Thompson and Jerome
Vaccaro, M.D. to serve as Directors on our Board of Directors for one year
or until their respective successors have been elected.
Full
discovery in the action occurred in September, October and
November. On December 1 and 2, 2009, the Chancery Court conducted a
trial of the matter. At the close of the trial, the court granted
judgment to the Company on Brandt’s complaint and dismissed Brandt’s action with
prejudice. The Chancery Court thereby found that the purported
special meeting of stockholders convened by Brandt on September 4, 2009 was not
valid and that the directors purportedly elected at that meeting are not
entitled to be seated. On January 4, 2010, Brandt filed an appeal
with the Supreme Court of the State of Delaware in relation to the case, which
the Company believes is without merit and intends to vigourously
defend.
Delaware
Chancery Court – CNS Response, Inc. v. Leonard Brandt, C.A. No. 4901-CC (Breach
of Fiduciary Duty)
On
September 16, 2009, we filed a complaint in the Delaware Chancery Court against
Brandt for violations of his fiduciary duty of loyalty to the Company and its
stockholders. On December 2, 2009, the Chancery Court dismissed the
Company’s breach of fiduciary duty claims without prejudice.
United
States District Court for the Central District of California - CNS
Response, Inc. v. Leonard Brandt, EAC Investment Limited Partnership and EAC
Investment, Inc. (Case No. SACV 09-00756-CJC)
On July
2, 2009, we filed a complaint against Brandt, EAC Investment Limited Partnership
and EAC Investment, Inc. (collectively, “EAC”), another stockholder of the
Company. In that complaint, we allege that Brandt has violated
sections 14(a) and 13(d) of the Securities Exchange Act of 1934, as amended, and
related SEC rules and regulations (the “Exchange Act”), in connection with his
ongoing campaign to seize control of the company by unseating the incumbent
directors (other than Brandt). We allege that EAC violated Section
13(d) of the Exchange Act. The Company sought injunctive and
declaratory relief to prevent the use of proxies and written consents that
Brandt or the other defendants obtained in violation of law, declaring the
proxies obtained by Brandt invalid, prohibiting any further unlawful
proxy solicitation and any further violations of Section 13(d) and 14(a) of
the Exchange Act, and requiring remedial disclosures. The Company
also sought damages in an amount to be determined.
The
defendants responded to our complaint by filing motions to dismiss on July 27,
2009 pursuant to Federal Rule of Civil Procedure 12(b)(6), based on two primary
arguments: (i) that the defendants had filed preliminary proxy materials,
preliminary consent solicitation materials and/or amended Schedule 13Ds with the
SEC, and those filings cured any alleged violations, and (ii) that we faced
no imminent threat of irreparable injury and, therefore, were not entitled to
injunctive relief. EAC also moved to dismiss the complaint against it
for improper venue. We filed our oppositions to the motions to
dismiss on August 10, 2009. On August 18, 2009, the court denied the
motions to dismiss, finding, among other things, that our complaint adequately
pled a basis for relief and that whether Brandt’s filings could cure the alleged
violations of sections 14(a) and 13(d) were questions of fact that could not be
resolved in a motion to dismiss.
51
On August
17, 2009, Brandt distributed to our stockholders by email preliminary proxy
materials with a proxy card. On August 21, 2009, we filed a motion
for temporary restraining order to enjoin Brandt from using any invalidly
obtained proxies or consents, including any proxies or consents obtained in
response to his preliminary proxy statement distribution. We
asserted, among other things, that the delivery of preliminary proxy
materials including a proxy card violated Rule 14a-4(f) of the Exchange Act and
that the disclosures contained in, or omitted from, the materials distributed by
Brandt violated Rule 14a-9 of the Exchange Act. On August 25, 2009,
the court denied our motion for the temporary restraining order citing, among
other things, an affidavit provided by Brandt that he would not solicit proxies
until he has filed a definitive proxy statement with the Securities and Exchange
Commission.
On
September 17, 2009, the defendants in the case filed counterclaims against us,
our Chief Executive Officer and director George Carpenter, and "Roes 1 through
10," alleging violations of Section 14 of the Exchange Act in the solicitation
of proxies or the revocation of proxies. Unspecified damages and
injunctive relief are sought. On December 14, 2009, the company and
George Carpenter answered the counterclaims in the case.
Given our
victory in the Delaware Court of Chancery (which is now being appealed by
Brandt), we have not determined whether or how we will pursue this
action. Mr. Brandt may choose to proceed with his
counterclaim.
We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt. Although the ruling by the Delaware Chancery Court
appears to us to be definitive and dispositive, we will be required to expend
additional resources as a result of the appeals to the Delaware Supreme Court
filed by Brandt. We also do not know whether Mr. Brandt will institute new
claims against us and the defense of any such claims could involve the
expenditure of additional resources by the Company.
Website
We
maintain a website at www.CNSResponse.com. The reference to our web address does
not constitute incorporation by reference of the information contained at this
site.
52
MANAGEMENT
The
following table sets forth the name, age and position of each of our executive
officers and directors as of January 15, 2010.
Name
|
Age
|
Position
|
George
Carpenter
|
51
|
Chairman
of the Board, Chief Executive Officer and Secretary
|
Daniel
Hoffman
|
61
|
President,
Chief Medical Officer
|
John
Pappajohn
|
81
|
Director
|
David
B. Jones
|
66
|
Director
|
Jerome
Vaccaro, M.D.
|
54
|
Director
|
Dr.
Henry T. Harbin
|
63
|
Director
|
Tommy
Thompson
|
66
|
Director
|
George
Carpenter, Chairman of the Board, Chief Executive Officer,
Secretary
George
Carpenter has served as our Chief Executive Officer since April 10, 2009 and
prior to that date served as our President since October 1, 2007. As
President, Mr. Carpenter’s primary responsibility involved developing strategy
and commercializing our rEEG technology. From 2002 until he joined CNS, Mr.
Carpenter was the President and CEO of WorkWell Systems, Inc., a national
physical medicine firm that manages occupational health programs for Fortune 500
employers. Prior to his position at WorkWell Systems, Mr. Carpenter
founded and served as Chairman and CEO of Core, Inc., a company focused on
integrated disability management and work-force analytics. He served
in those positions from 1990 until Core was acquired by Assurant, Inc. in
2001. From 1984 to 1990, Mr. Carpenter was a Vice President of
Operations with Baxter Healthcare, served as a Director of Business Development
and as a strategic partner for Baxter's alternate site
businesses. Mr. Carpenter began his career at Inland Steel where he
served as a Senior Systems Consultant in manufacturing process control. Mr.
Carpenter holds an MBA in Finance from the University of Chicago and a BA with
Distinction in International Policy & Law from Dartmouth
College.
Daniel
Hoffman, Chief Medical Officer and President
Dr.
Hoffman became our President on April 10, 2009 and our Chief Medical Officer on
January 15, 2008 upon our acquisition of Neuro-Therapy Clinic, Inc., which at
the time of the acquisition was our largest customer and which was owned by Dr.
Hoffman. He had served as the Medical Director of Neuro-Therapy
Clinic, Inc. since 1993. Dr. Hoffman is a Neuropsychiatrist with over 25 years
experience treating general psychiatric conditions such as depression, bipolar
disorder and anxiety. He provides the newest advances in diagnosing and treating
attentional and learning problems in children and adults. Dr. Hoffman has
authored over 40 professional articles, textbook chapters, poster presentations
and letters to the editors on various aspects of neuropsychiatry, Quantitative
EEG, LORETA, Referenced EEG, advances in medication management, national
position papers and standards, Mild Traumatic Brain Injury, neurocognitive
effects of Silicone Toxicity, sexual dysfunction and other various topics. Dr.
Hoffman has given over 58 major presentations and seminars, including Grand
Rounds at Universities and Hospitals, workshops and presentations at national
society meetings (such as American Psychiatric Association and American
Neuropsychiatric Association), national CME conferences, insurance companies,
national professional associations, panel member discussant, and presenter of
poster sessions. He has also lectured internationally as part of a consortium
advancing Quantitative EEG in Psychiatry and done research with the major
national academic institutions on the use of Referenced EEG to help guide
treatment choices and as a Biomarker. Dr. Hoffman has a
Bachelor of Science in Psychology from the University of Michigan, an MD from
Wayne State University School of Medicine and conducted his Residency in
Psychiatry at the University of Colorado Health Sciences Center. During the past
five years, Dr. Hoffman has served as the President of Neuro-Therapy Clinic,
Inc., a wholly-owned subsidiary of the company that is focused on discovering
ways to integrate technology into the creation of better business
practices.
53
John
Pappajohn, Director
John
Pappajohn joined our board of directors on August 26, 2009. Since
1969, Mr. Pappajohn has been the President and sole owner of Pappajohn Capital
Resources, a venture capital firm, and President and sole owner of Equity
Dynamics, Inc., a financial consulting firm, both located in Des Moines,
Iowa. He serves as a director on the boards of the following public
companies: American CareSource Inc., Dallas, TX since 1994;
PharmAthene, Inc., Annapolis, MD., since 2007; Spectrascience, Inc., San Diego,
CA, since 2007; CareGuide, Inc., Florida, (formerly Patient
Infosystems, Inc.), since 1996; and ConMed Healthcare Management,
Inc., Hanover, MD since 2005.
David
B. Jones, Director
David B.
Jones has been a director of CNS California since August 2006, and became a
director of the company upon the completion of our merger with CNS California on
March 7, 2007. Mr. Jones currently serves as a partner of Sail
Venture Partners, L.P., a position which he has held since 2003. From
1998 to 2004, Mr. Jones served as Chairman and Chief Executive Officer of
Dartron, Inc., a computer accessories manufacturer. From 1985 to 1997, Mr. Jones
was a general partner of InterVen Partners, a venture capital firm with offices
in Southern California and Portland, Oregon. From 1979 to 1985, Mr. Jones was
President and Chief Executive Officer of First Interstate Capital, Inc., the
venture capital affiliate of First Interstate Bancorp. Mr. Jones is a graduate
of Dartmouth College and holds Masters of Business Administration and law
degrees from the University of Southern California.
Jerome
Vaccaro, M.D., Director
Jerome
Vaccaro, M.D., joined the Board of directors of CNS California in 2006 and
became a director of the company upon the completion of our merger with CNS
California on March 7, 2007. Dr. Vaccaro is President and Chief
Operating Officer of APS Healthcare, Inc, (APS) a privately held specialty
healthcare company, which he joined in June 2007. From February 2001
until its acquisition by United Health Group in 2005, Dr. Vaccaro served as
President and Chief Executive Officer of PacifiCare Behavioral Health (“PBH”),
and then served as Senior Vice President with United Health Group’s Specialized
Care Services until he joined APS. Dr. Vaccaro has also served as
Medical Director of PBH (1996-2001), Chief Executive Officer of PacifiCare
Dental and Vision (2002-2004), and Senior Vice President for the PacifiCare
Specialty Health Division (2002-2004). Dr. Vaccaro has an extensive background
in community mental health and public sector work, including editing the
textbook, “Practicing Psychiatry in the Community,” which is hailed as the
definitive community psychiatry text. Dr. Vaccaro completed medical school and a
Psychiatry Residency at the Albert Einstein College of Medicine in New York
City. After his training, Dr. Vaccaro served on the full-time faculty of the
University of Hawaii (1985-1989) and UCLA (1989-1996) Departments of
Psychiatry.
54
Henry
T. Harbin, M.D., Director
Henry
Harbin, M.D. joined our Board of directors on October 17, 2007. Since
2004, Dr. Harbin has worked as an independent consultant providing health care
consulting services to a number of private and public organizations. Dr. Harbin
is a Psychiatrist with over 30 years of experience in the behavioral health
field. He has held a number of senior positions in both public and private
health care organizations. He worked for 10 years in the public mental health
system in Maryland serving as Director of the state mental health authority for
three of those years. He has been CEO of two national behavioral
healthcare companies - Greenspring Health Services and Magellan Health Services.
At the time he was CEO of Magellan, it was the largest managed behavioral
healthcare company managing the mental health and substance abuse benefits of
approximately 70 million Americans including persons who were insured by private
employers, Medicaid and Medicare. In 2002 and 2003, he served on the President's
New Freedom Commission on Mental Health. As a part of the Commission
he was chair of the subcommittee for the Interface between Mental Health and
General Medicine. In 2005, he served as co-chair of the National
Business Group on Health's work group that produced the Employer's Guide to
Behavioral Health Services in December 2005.
Tommy
Thompson, Director
Tommy G.
Thompson joined our board of directors on August 26, 2009. Mr.
Thompson is the former Health and Human Services Secretary and four-term
Governor of Wisconsin. Since March 2005 he has been a partner at the
law firm of Akin Gump Strauss Hauer & Feld, and since February 2005 he also
has served as President of Logistics Health, Inc. He serves on the
boards of CR Bard and Centene Corporation, both of which are public companies,
and is Chairman of AGA Medical Corporation, a privately-held
company. Mr. Thompson served as HHS Secretary from 2001 to 2005 and
is one of the nation's leading advocates for the health and welfare of all
Americans. He is the 19th individual to serve as Secretary of the department,
which employs more than 60,000 personnel and had a fiscal year 2005 budget of
$584 billion. Mr. Thompson has dedicated his professional life to
public service and served as Governor of Wisconsin from 1987 to 2001. Mr.
Thompson was re-elected to office for a third term in 1994 and a fourth term in
1998. At HHS, Mr. Thompson led the Administration’s efforts to
pass and implement a new Medicare law that is for the first time providing a
drug benefit to America’s seniors. As governor, Mr. Thompson created the
nation's first parental school choice program in 1990, allowing low-income
Milwaukee families to send children to the private or public school of their
choice. He created Wisconsin's Council on Model Academic Standards, which
implemented high academic standards for English language arts, math, science and
social studies. Mr. Thompson began his career in public service in 1966 as a
representative in Wisconsin's state Assembly. He was elected assistant Assembly
minority leader in 1973 and Assembly minority leader in 1981. Mr. Thompson has
received numerous awards for his public service, including the Anti-Defamation
League's Distinguished Public Service Award. In 1997, Mr. Thompson received
Governing Magazine's Public Official of the Year Award, and the Horatio Alger
Award in 1998. Mr. Thompson served as chairman of the National Governors'
Association, the Education Commission of the States and the Midwestern
Governors' Conference. Mr. Thompson also served in the Wisconsin National Guard
and the Army Reserve.
Board
Composition and Committees and Director Independence
Our board
of directors currently consists of six members: George Carpenter, Henry Harbin,
David Jones, Jerome Vaccaro, John Pappajohn and Tommy Thompson. Each
director was elected at our annual meeting of shareholders held on September 29,
2009. Each of our directors will serve until our next annual meeting
or until his successor is duly elected and qualified.
We do not
have any committees, including an audit committee, compensation committee, or
nominating and corporate governance committee and the functions customarily
delegated to these committees are performed by our full board of
directors. In addition, we do not have any charters that relate to
the functions traditionally performed by these committees. We are not
a “listed company” under SEC rules and are therefore not required to have
separate committees comprised of independent directors. We have, however,
determined that David Jones, Jerome Vaccaro, Henry Harbin, John Pappajohn and
Tommy Thompson are “independent” as that term is defined in Section 5600 of the
Nasdaq Listing Rules as required by the NASDAQ Stock Market. In
addition, although our full board of directors functions as our audit committee,
we have determined that Jerome Vaccaro, David Jones, John Pappajohn and Tommy
Thompson are “independent” for purposes of Rule 5605-4 of the Nasdaq Listing
Rules as required by the NASDAQ Stock Market.
55
We have
also determined that David Jones qualifies as an “audit committee financial
expert” within the meaning of the rules and regulations of the SEC and that each
of our other board members are able to read and understand fundamental financial
statements and have substantial business experience that results in that
member's financial sophistication. Accordingly, our board of directors believes
that each of its members has sufficient knowledge and experience necessary to
fulfill the duties and obligations that an audit committee would
have.
56
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
As we do
not have a designated compensation committee, our full Board of Directors
oversees matters regarding executive compensation. The Board is
responsible for, among other functions: (1) reviewing and approving corporate
goals and objectives relevant to the compensation of our executive officers and
evaluating the performance of such executive officers in light of these
corporate goals and objectives; (2) administering our 2006 Stock Incentive Plan
and other equity incentive plans that we may adopt from time to time; and (3)
negotiating, reviewing and setting the annual salary, bonus, stock options and
other benefits, direct and indirect, of the Chief Executive Officer, and other
current and former executive officers. The Board also has the authority to
select and/or retain outside counsel, compensation and benefits consultants, or
any other consultants to provide independent advice and assistance in connection
with the execution of its responsibilities. Our “named executive officers” for
our fiscal year ended September 30, 2009 were as follows:
|
·
|
George
Carpenter, Chief Executive Officer.
|
|
·
|
Daniel
Hoffman, President and Chief Medical Officer;
and
|
|
·
|
Leonard
Brandt, Chief Executive Officer until April 10,
2009.
|
Compensation
Philosophy
Because
we are a small company with a total of 14 full-time employees, we do not have a
formal comprehensive executive compensation policy. As we expand our
operations, we intend to establish such policies to further our corporate
objectives. Generally, we compensate our executive officers with a
compensation package that is designed to drive company performance to maximize
shareholder value while meeting our needs and the needs of our executives. The
following are objectives we consider:
|
·
|
Alignment
- to align the interests of executives and shareholders through
equity-based compensation awards;
|
|
·
|
Retention
- to attract, retain and motivate highly qualified, high performing
executives to lead our growth and success;
and
|
|
·
|
Performance
- to provide, when appropriate, compensation that is dependent upon the
executive's achievements and the company’s
performance.
|
In order
to achieve the above objectives, our executive compensation philosophy is guided
by the following principles:
|
·
|
Rewards
under incentive plans are based upon our short-term and longer-term
financial results and increasing shareholder
value;
|
|
·
|
Executive
pay is set at sufficiently competitive levels to attract, retain and
motivate highly talented individuals who are necessary for us to strive to
achieve our goals, objectives and overall financial
success;
|
|
·
|
Compensation
of an executive is based on such individual's role, responsibilities,
performance and experience; and
|
57
|
·
|
Annual
performance of our company and the executive are taken into account in
determining annual bonuses with the goal of fostering a
pay-for-performance culture.
|
Compensation
Elements
We
compensate our executives through a variety of components, which may include a
base salary, annual performance based incentive bonuses, equity incentives, and
benefits and perquisites, in order to provide our executives with a competitive
overall compensation package. The mix and value of these components are impacted
by a variety of factors, such as responsibility level, individual negotiations
and performance and market practice. The purpose and key characteristics for
each component are described below.
Base
Salary
Base
salary provides executives with a steady income stream and is based upon the
executive's level of responsibility, experience, individual performance and
contributions to our overall success, as well as negotiations between the
company and such executive officer. Competitive base salaries, in conjunction
with other pay components, enable us to attract and retain talented executives.
The Board typically sets base salaries for our executives at levels that it
deems to be competitive, with input from our Chief Executive
Officer.
Annual
Incentive Bonuses
Annual
incentive bonuses are a variable performance-based component of compensation.
The primary objective of an annual incentive bonus is to reward executives for
achieving corporate and individual goals and to align a portion of total pay
opportunities for executives to the attainment of our company's performance
goals. Annual incentive awards, when provided, act as a means to recognize the
contribution of our executive officers to our overall financial, operational and
strategic success.
Equity
Incentives
Equity
incentives are intended to align executive and shareholder interests by linking
a portion of executive pay to long-term shareholder value creation and financial
success over a multi-year period. Equity incentives may also be provided to our
executives to attract and enhance the retention of executives and to facilitate
stock ownership by our executives. The Board considers individual and company
performance when determining long-term incentive opportunities.
Health
& Welfare Benefits
The
executive officers participate in health and welfare, and paid time-off benefits
which we believe are competitive in the marketplace. Health and welfare and paid
time-off benefits help ensure that we have a productive and focused
workforce.
Severance
and Change of Control Arrangements
We do not
have a formal plan for severance or separation pay for our employees, but we
typically include a severance provision in the employment agreements of our
executive officers that have written employment agreements with
us. Generally, such provisions are triggered in the event of
involuntary termination of the executive without cause or in the event of a
change in control. Please see the description of our employment
agreements with each of George Carpenter and Daniel Hoffman below for further
information.
58
Other
Benefits
In order
to attract and retain highly qualified executives, we may provide our executive
officers with automobile allowances, consistent with current market
practices.
Accounting
and Tax Considerations
We
consider the accounting implications of all aspects of our executive
compensation strategy and, so long as doing so does not conflict with our
general performance objectives described above, we strive to achieve the most
favorable accounting (and tax) treatment possible to the company and our
executive officers.
Process
for Setting Executive Compensation; Factors Considered
When
making pay determinations for named executive officers, the Board considers a
variety of factors including, among others: (1) actual company performance as
compared to pre-established goals, (2) individual executive performance and
expected contribution to our future success, (3) changes in economic conditions
and the external marketplace, (4) prior years’ bonuses and long-term incentive
awards, and (5) in the case of executive officers, other than Chief Executive
Officer, the recommendation of our Chief Executive Officer, and in the case of
our Chief Executive Officer, his negotiations with our Board. No specific
weighing is assigned to these factors nor are particular targets set for any
particular factor. Ultimately, the Board uses its judgment and discretion when
determining how much to pay our executive officers and sets the pay for such
executives by element (including cash versus non-cash compensation) and in the
aggregate, at levels that it believes are competitive and necessary to attract
and retain talented executives capable of achieving the Company's long-term
objectives.
Summary
Compensation Table
The
following table provides disclosure concerning all compensation paid for
services to us in all capacities for our fiscal years ending September 30, 2009
and 2008 (i) as to each person serving as our principal executive officer
(“PEO”) or acting in a similar capacity during our fiscal year ended September
30, 2009, and (ii) as to our most highly compensated executive officer other
than our PEO who was serving as an executive officer at the end of our fiscal
year ended September 30, 2009, whose compensation exceeded
$100,000. The people listed in the table below are referred to as our
“named executive officers”.
Name and
Principal Position
|
Fiscal Year
Ended
September
30,
|
Salary
($)
|
Bonus
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||
George
Carpenter (Chief Executive Officer,
|
2009
|
180,000 | 0 | 0 | 20,500 | (2) | 200,500 | |||||||||||||||
Principal
Executive Officer, Director)
|
2008
|
180,000 | 0 | 680,700 | (1) | 16,300 | (2) | 877,000 | ||||||||||||||
Daniel
Hoffman (President, Chief Medical Officer)
|
2009
|
150,000 | 0 | 0 | 33,400 | (3) | 183,400 | |||||||||||||||
2008
|
108,100 | 0 | 0 | 39,200 | (3) | 147,300 | ||||||||||||||||
Leonard
Brandt (Former Chief Executive Officer,
|
2009
|
119,800 | 0 | 0 | 20,500 | 140,300 | ||||||||||||||||
Former
Principal Executive Officer, Former Director)
|
2008
|
175,000 | 0 | 0 | 19,000 | (2) | 194,000 |
59
(1) These
options were granted on October 1 2007. The fair value of the options
was estimated on the date of grant using the Black-Scholes option pricing model
using the assumptions detailed in Note 4 to the Financial
Statements.
(2) Relates
to healthcare insurance premiums paid on behalf of executive officers by the
company.
(3) Relates
to healthcare insurance premiums for the year ended September 30, 2009 of
$28,300 and automobile expenses of $4,400 paid on behalf of Dr. Hoffman by the
company. For the year ended September 30, 2008, healthcare insurance premiums
were $15,300 and automobile expenses were $8,900. Additionally Dr.
Hoffman was paid $15,000 in consulting fees for services rendered to the company
prior to his employment.
Grant
of Plan Based Awards in the Fiscal Year Ending September 30, 2009
No option
grants to executive officers occurred during fiscal year ending September 30,
2009 under our 2006 Stock Incentive Plan, which is the only plan pursuant to
which awards can be granted, as the Board was focused on management changes,
securing funding and defending against a lawsuit brought by a dissident
shareholder and fellow director.
Narrative
Disclosure to Summary Compensation Table and Grants of Plan-Based Awards
Table
Since we
had $0.99 million in cash and cash equivalents and a working capital deficit of
approximately $1.1 million as of September 30, 2009, we elected to preserve our
cash and did not pay any bonuses to our executive officers during our fiscal
year ended September 30, 2009. As discussed, we do not have a formal
plan for determining the compensation of our executive
officers. Instead, each named executive officer negotiates the terms
of their employment with us, taking into account our compensation philosophy
outlined above. The following is a summary of each employment
agreement that we have entered into with respect to our named executive
officers, which summary includes, where applicable, a description of all
payments the company is required to make to such named executive officers at,
following or in connection with the resignation, retirement or other termination
of such named executive officers, or a change in control of our company or a
change in the responsibilities of such named executive officers following a
change in control.
Employment
Agreements
George Carpenter
On
October 1, 2007, after our 2007 fiscal year end, we entered into an employment
agreement with George Carpenter pursuant to which Mr. Carpenter served as our
President. During the period of his employment, Mr. Carpenter will
receive a base salary of no less than $180,000 per annum, which is subject to
upward adjustment at the discretion of the Chief Executive Officer or our Board
of Directors. In addition, pursuant to the terms of the employment
agreement, on October 1, 2007, Mr. Carpenter was granted an option to purchase
968,875 shares of our common stock at an exercise price of $0.89 per share
pursuant to our 2006 Stock Incentive Plan. These options vest as
follows: 121,109 shares vested immediately with the remaining 847,766 shares
vesting equally over 42 months commencing April 30, 2008. In the
event of a change of control transaction, a portion of Mr. Carpenter’s unvested
options equal to the number of unvested options at the date of the corporate
transaction multiplied by the ratio of the time elapsed between October 1, 2008
and the date of corporate transaction over the vesting period (48 months) will
automatically accelerate, and become fully vested. Mr. Carpenter will
be entitled to four weeks vacation per annum, health and dental insurance
coverage for himself and his dependents, and other fringe benefits that we may
offer our employees from time to time.
60
Mr.
Carpenter's employment is on an "at-will" basis, and Mr. Carpenter may terminate
his employment with us for any reason or for no reason. Similarly, we may
terminate Mr. Carpenter's employment with or without cause. If we
terminate Mr. Carpenter's employment without cause or Mr. Carpenter
involuntarily terminates his employment with us (an involuntary termination
includes changes, without Mr. Carpenter’s consent or pursuant to a corporate
transaction, in Mr. Carpenter’s title or responsibilities so that he is no
longer the President of the company), Mr. Carpenter shall be eligible to receive
as severance his salary and benefits for a period equal to six months payable in
one lump sum of $98,100 upon termination. If Mr. Carpenter is
terminated by us for cause, or if Mr. Carpenter voluntarily terminates his
employment, he will not be entitled to any severance.
As of
April 10, 2009, Mr. Carpenter was named Chief Executive Officer and a Director
of the company and Daniel Hoffman became our President. Other than
Mr. Carpenter’s change in title, there have been no changes in the terms of Mr.
Carpenter’s employment with us.
Daniel Hoffman
On
January 11, 2008, we entered into an employment agreement with Daniel Hoffman
pursuant to which Dr. Hoffman began serving as our Chief Medical Officer
effective January 15, 2008. During the period of his employment, Dr. Hoffman
will receive a base salary of $150,000 per annum, which is subject to upward
adjustment. Dr. Hoffman will also have the opportunity to receive bonus
compensation, if and when approved by our Board of Directors. Dr.
Hoffman's employment is on an "at-will" basis, and Dr. Hoffman may terminate his
employment with us for any reason or for no reason. Similarly, we may terminate
Dr. Hoffman's employment with or without cause. If we terminate Dr. Hoffman's
employment without cause or Dr. Hoffman involuntarily terminates his employment
with us (an involuntary termination includes changes, without Dr. Hoffman’s
consent or pursuant to a corporate transaction, in Dr. Hoffman’s title or
responsibilities so that he is no longer the Chief Medical Officer of the
company), Dr. Hoffman will be eligible to receive as severance his salary and
benefits for a period equal to six months payable in one lump sum of $92,000
upon termination. If Dr. Hoffman is terminated by us for cause, or if Dr.
Hoffman voluntarily terminates his employment, he will not be entitled to any
severance. Dr. Hoffman will be entitled to four weeks vacation per annum, health
and dental insurance coverage for himself and his dependents, and other fringe
benefits that we may offer our employees from time to time.
Prior to
his employment, from October 1, 2007 to January 15, 2008 Dr. Hoffman earned
$15,000 for consulting services rendered to the company. In addition,
as compensation for his services to us as a consultant, Dr. Hoffman was granted
options to purchase an aggregate of 814,062 shares of our common stock at an
exercise price of $1.09 on August 7, 2007. In accordance with the terms of his
employment agreement, the terms of Dr. Hoffman's option grant were amended to
provide that in the event of a change of control transaction, a portion of Dr.
Hoffman's unvested options equal to the number of unvested options at the date
of the corporate transaction multiplied by the ratio of the time elapsed between
August 7, 2007 and the date of corporate transaction over the vesting period (42
months), will automatically accelerate, and become fully vested.
In
addition to being the Chief Medical Officer, Dr. Hoffman was named President of
the Company on April 10, 2009.
The
Company has no other employment agreements with its executive
officers.
61
2006
Stock Incentive Plan
On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the "2006 Plan"). On March 7, 2007, in connection with the closing of the
merger transaction with CNS California, we assumed the CNS California stock
option plan and all of the options granted under the plan at the same price and
terms. The following is a summary of the 2006 Plan, which we use to
provide equity compensation to employees, directors and consultants to the
company.
The 2006
Plan provides for the issuance of awards in the form of restricted shares, stock
options (which may constitute incentive stock options (ISO) or nonstatutory
stock options (NSO)), stock appreciation rights and stock unit grants to
eligible employees, directors and consultants and is administered by the board
of directors. A total of 10 million shares of stock are reserved for issuance
under the 2006 Plan. As of September 30, 2009, 2,124,740 options were exercised
and there were 6,662,014 options and 183,937 restricted shares outstanding under
the 2006 Plan and 1,029,309 shares available for issuance of
awards. The 2006 Plan provides that in any calendar year, no eligible
employee or director shall be granted an award to purchase more than 3 million
shares of stock. The option price for each share of stock subject to an option
shall be (i) no less than the fair market value of a share of stock on the date
the option is granted, if the option is an ISO, or (ii) no less than 85% of the
fair market value of the stock on the date the option is granted, if the option
is a NSO; provided, however, if the option is an ISO granted to an eligible
employee who is a 10% shareholder, the option price for each share of stock
subject to such ISO shall be no less than 110% of the fair market value of a
share of stock on the date such ISO is granted. Stock options have a maximum
term of ten years from the date of grant, except for ISOs granted to an eligible
employee who is a 10% shareholder, in which case the maximum term is five years
from the date of grant. ISOs may be granted only to eligible
employees.
Outstanding
Equity Awards at Fiscal Year-End 2009
The
following table presents information regarding outstanding options held by our
named executive officers as of the end of our fiscal year ended September 30,
2009. During the fiscal year ended September 30, 2009, Leonard Brandt
exercised 2,124,740 options at an exercise price of $0.132 per share which were
granted on August 11, 2006.
Name
|
Number of Securities Underlying
Unexercised Options (#)
|
Option Exercise
Price ($)
|
Option Expiration
Date
|
||||||||||
Exercisable
|
Unexercisable
|
||||||||||||
George
Carpenter (1)
|
484,454 | 484,421 | 0.89 |
October
1, 2017
|
|||||||||
Daniel
Hoffman (2)
|
508,796 | 305,796 | 1.09 |
August
8, 2017
|
|||||||||
119,013 | 0 | 0.12 |
August
11, 2016
|
||||||||||
Leonard
Brandt (3)
|
229,353 | 104,258 | 1.20 |
August
8, 2012
|
|||||||||
827,930 | 140,959 | 1.09 |
August
8,
2017
|
(1) Please
see the summary of Mr. Carpenter’s employment agreement above, which describes
the vesting terms of the options granted to Mr. Carpenter.
(2) On
August 8, 2007, Dr. Hoffman was granted options to purchase 814,062 shares of
our common stock. The options are exercisable at $1.09 per share and
vest as follows: options to purchase 203,516 shares vested on March
8, 2008; options to purchase 593,600 shares vest in equal monthly installments
of 16,960 shares over 35 months commencing on April 30, 2008; the remaining
options to purchase 16,946 shares vest on March 31, 2011. On August
11, 2006, Dr. Hoffman was granted an option to purchase 119,013 shares of common
stock at an exercise price of $0.12 per share, which is now fully
exercisable.
62
(3) On
August 8, 2007, Mr. Brandt was granted options to purchase 1,302,500 shares of
our common stock. The options were exercisable at $1.20 per share as
to 333,611 shares and $1.09 per share as to 968,889 shares. The
option to purchase 333,611 of our shares was scheduled to vest as
follows: options to purchase 83,403 shares vested on August 8, 2007,
the date of grant; options to purchase 243,250 shares were scheduled to
vest in equal monthly installments of 6,950 shares over 35 months commencing on
January 31, 2008 and the remaining options to purchase 6,958 shares were
scheduled to vest on December 31, 2010. The option to purchase
968,889 of our shares was scheduled to vest as follows: options to purchase
269,357 shares vested on August 8, 2007, the date of grant; options to purchase
135,675 shares vested in equal monthly installments of 27,135 shares over 5
months beginning on August 31 2007; options to purchase 543,726 shares were
scheduled to vest in equal monthly installments of 20,138 shares over 27 months
beginning on January 31, 2008 and the remaining options to purchase 20,131
shares were scheduled to vest on April 30, 2010. Upon Mr. Brandt’s
termination as a Director on December 2, 2009, Mr. Brandt forfeited 90,358
options having an exercise price of $1.20 per share and 100,683 options having
an exercise price of $1.09 per share.
Director
Compensation
During
our fiscal year ended September 30, 2009, our non-employee directors did not
receive compensation for their services on our board. We do not pay
management directors for board service in addition to their regular employee
compensation. The full Board of Directors has the primary
responsibility for reviewing and considering any revisions to director
compensation. Going forward, we intend to compensate our non-employee
directors for their service on our Board with a combination of cash payments and
option grants. As described below, Dr. Harbin received compensation
for consulting services he provided to the company during our fiscal year ending
September 30, 2009.
Non-Employee Director Compensation
|
||||||||
Name
|
All Other Compensation
($)
|
Total ($)
|
||||||
Jerome
Vaccaro (1)
|
0 | 0 | ||||||
Henry
Harbin (2)
|
46,400 | 46,400 | ||||||
John
Pappajohn (3)
|
0 | 0 | ||||||
Tommy
Thompson (3)
|
0 | 0 | ||||||
David
Jones (3)
|
0 | 0 |
(1) On
August 28, 2006 Dr. Vaccaro was granted 20,000 options having an exercise price
of $0.12 for his service as a Director. The options vested
semiannually in four equal amounts over a period of two years commencing
February 28, 2007 through August 31, 2008. These options expire on
August 28, 2016 and are fully vested.
(2) On
August 8, 2007, we entered into an agreement with Dr. Harbin for consulting
services. Pursuant to the agreement, we granted options to purchase
24,000 shares of our common stock at an exercise price of $1.09 per share
pursuant to our 2006 Stock Incentive Plan. The options expire on
August 8, 2017 and are now fully vested.
As
compensation for his service as a Director of the company, on December 19, 2007,
we granted Dr. Harbin options to purchase 20,000 shares of our common stock at
an exercise price of $0.80 per share under our 2006 Stock Incentive
Plan. The options expire on December 19, 2017 and are now fully
vested.
63
On April
15, 2008, we entered into a consulting agreement with Dr. Harbin which expired
on December 31, 2008. Pursuant to the agreement, we paid Dr. Harbin a
consulting fee of $24,000 in cash of which $8,000 was paid during the fiscal
year ended September 30, 2009. Additionally Dr Harbin was granted options to
purchase 56,000 shares of our common stock at an exercise price of $0.96 per
share under our 2006 Stock Incentive Plan. The options expire on
April 15, 2018 and are now fully vested.
On March
17, 2009, we entered into a consulting agreement with Dr. Harbin which expired
on December 31, 2009 pursuant to which Dr. Harbin was to be paid an aggregate of
$24,000 as compensation for his consulting services. Dr. Harbin was
paid the $24,000 due to him in January 2010. In addition, as further
compensation, we granted Dr. Harbin options to purchase 56,000 shares of our
common stock at an exercise price of $0.40 per share, with the options vesting
in equal monthly installments over a twelve month period commencing on January
1, 2009. The options expire on March 17, 2019. The fair
value of the options was estimated to be $22,400 on the date of grant using the
Black-Scholes option pricing model using the assumptions detailed in Note 4 to
the Financial Statements.
(3) No
options have been granted to Mr. Pappajohn, Mr. Thompson or Mr.
Jones.
Changes
in Control
We do not
have any arrangements which may at a subsequent date result in a change in
control.
64
PRINCIPAL
AND SELLING STOCKHOLDERS
The
selling security holders may offer and sell, from time to time, any or all of
the shares of common stock held by them. Because the selling security
holders may offer all or only some portion of the 65,317,536 shares of common
stock to be registered, we cannot estimate how many shares of common stock the
selling security holders may hold upon termination of the offering, nor can we
express, as a percentage, how this number of shares will relate to the total
number of shares that we will have outstanding at that time.
The
following table presents information regarding the beneficial ownership of our
common stock as of January 15, 2010, and the number of shares of common stock
covered by this prospectus. The number of shares in the table
represents an estimate of the number of shares of common stock to be offered
by:
|
·
|
each
of the executive officers;
|
|
·
|
each
of our directors;
|
|
·
|
all
of our directors and executive officers as a
group;
|
|
·
|
each
stockholder known by us to be the beneficial owner of more than 5% of our
common stock; and
|
|
·
|
each
of the selling stockholders.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Unless otherwise
indicated below, to our knowledge, the persons and entities named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Shares
of our common stock subject to options and warrants from the company that are
currently exercisable or exercisable within sixty days of January 15, 2010 are
deemed to be outstanding and to be beneficially owned by the person holding the
options for the purpose of computing the percentage ownership of that person but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
The
information presented in this table is based on 53,567,795 shares of our common
stock outstanding on January 15, 2010. Unless otherwise indicated,
the address of each of the executive officers and directors and 5% or more
stockholders named below is c/o CNS Response, Inc., 85 Enterprise, Suite 410,
Aliso Viejo, CA 92656.
Number of Shares
Beneficially Owned
Prior to Offering
|
Number of
|
Number of Shares
Beneficially Owned
After Offering
|
||||||||||||||||||
Name of Beneficial Owner
|
Number
|
Percentage
of Shares
Outstanding
|
Shares
Being
Offered
|
Number
|
Percentage
of Shares
Outstanding
|
|||||||||||||||
Executive
Officers and Directors:
|
||||||||||||||||||||
George
Carpenter (1)
Chief
Executive Officer, Secretary
|
1,125,341 | 2.1 | % | 540,000 | 585,341 | 1.1 | % | |||||||||||||
Dr.
Daniel Hoffman (2)
President
and Chief Medical Officer
|
823,654 | 1.5 | % | 110,545 | 713,109 | 1.3 | % |
65
Number of Shares
Beneficially Owned
Prior to Offering
|
Number of
|
Number of Shares
Beneficially Owned
After Offering
|
||||||||||||||||||
Name of Beneficial Owner
|
Number
|
Percentage
of Shares
Outstanding
|
Shares
Being
Offered
|
Number
|
Percentage
of Shares
Outstanding
|
|||||||||||||||
David
B. Jones(3)
Director
|
8,696,055 | 15.6 | % | 8,696,055 | - | - | ||||||||||||||
Dr.
Jerome Vaccaro (4)
Director
|
20,000 | * | - | 20,000 | * | |||||||||||||||
Dr.
Henry Harbin (5)
Director
|
166,834 | * | 10,834 | 156,000 | * | |||||||||||||||
John
Pappajohn (6)
Director
|
12,333,335 | 20.8 | % | 12,333,335 | - | - | ||||||||||||||
Tommy
Thompson,
Director
|
- | - | - | - | - | |||||||||||||||
Directors
and officers as a group (7 persons) (7)
|
23,165,219 | 36.7 | % | 21,690,769 | 1,474,450 | 2.7 | % | |||||||||||||
5%
Stockholders:
|
||||||||||||||||||||
Leonard
Brandt (8)
Director,
Chief Executive Officer and Secretary
|
11,081,982 | 19.9 | % | 9,970,523 | 1,111,459 | 2.0 | % | |||||||||||||
Sail
Venture Partners LP (3)
|
8,696,055 | 15.6 | % | 8,696,055 | - | - | ||||||||||||||
Other
Selling Stockholders:
|
- | - | ||||||||||||||||||
Argyris
Vassiliou (9)
|
500,001 | * | 500,001 | - | - | |||||||||||||||
James
Howard Desnick, M.D. (10)
|
1,620,000 | 3.0 | % | 1,620,000 | - | - | ||||||||||||||
Peter
Unanue (11)
|
974,990 | 1.8 | % | 974,990 | - | - | ||||||||||||||
Ann
Vassiliou Children’s Trust P2587 (12)
|
500,001 | * | 500,001 | - | - | |||||||||||||||
AC
Care, LLC (13)
|
100,000 | * | 100,000 | - | - | |||||||||||||||
AJWC
Ltd. (14)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Andy’s
Liquor, Inc. (15)
|
750,000 | 1.4 | % | 750,000 | - | - | ||||||||||||||
Paul
Buck (16)
|
270,000 | * | 270,000 | - | - | |||||||||||||||
Theodore
Chafoulias (17)
|
150,000 | * | 150,000 | - | - | |||||||||||||||
Dennis
James Colbert and Patti J. Colbert, as joint tenants with right of
survivorship (18)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Ronald
I. Dozoretz, M.D. (19)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Richard
L. Hexum, Jr. (20)
|
770,000 | 1.4 | % | 770,000 | - | - | ||||||||||||||
Larry
Hopfenspirger (21)
|
600,000 | 1.1 | % | 600,000 | - | - | ||||||||||||||
William
and Joanne Jellison (22)
|
500,000 | * | 500,000 | - | - | |||||||||||||||
Jeffrey
P. Knightly (23)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Meyer
Leon Proler (24)
|
1,311,567 | 2.4 | % | 1,311,567 | - | - | ||||||||||||||
Dale
Ragan (25)
|
770,000 | 1.4 | % | 770,000 | - | - | ||||||||||||||
Richard
Lee Roehl (26)
|
1,080,000 | 2.0 | % | 1,080,000 | - | - | ||||||||||||||
Lindsay
A. Rosenwald, M.D. (27)
|
1,080,000 | 2.0 | % | 1,080,000 | - | - | ||||||||||||||
Gene
Salkind, M.D. (28)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Starr
F. Schlobohm Rev. Trust U/D/A 12/09/04 (29)
|
540,000 | 1.0 | % | 540,000 | - | - |
66
Number of Shares
Beneficially Owned
Prior to Offering
|
Number of
|
Number of Shares
Beneficially Owned
After Offering
|
||||||||||||||||||
Name of Beneficial Owner
|
Number
|
Percentage
of Shares
Outstanding
|
Shares
Being
Offered
|
Number
|
Percentage
of Shares
Outstanding
|
|||||||||||||||
Myron
F. Steves, Jr. (30)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
David
S. Strutt (31)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Brian
J. Thompson (32)
|
270,000 | * | 270,000 | - | - | |||||||||||||||
Mark
C. Thompson & Bonita S. Thompson Revocable Living Trust Dated 1/14/04
(33)
|
1,620,000 | 3.0 | % | 1,620,000 | - | - | ||||||||||||||
John
Francis Wheeler (34)
|
270,000 | * | 270,000 | - | - | |||||||||||||||
White
Sand Investor Group, L.P. (35)
|
1,350,000 | 2.5 | % | 1,350,000 | - | - | ||||||||||||||
B +
D Associates (36)
|
500,000 | * | 500,000 | - | - | |||||||||||||||
Adolfo
and Donna Carmona, as joint tenants with right of survivorship
(37)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
The
Carnahan Trust (38)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Jordan
Family LLC (39)
|
330,000 | * | 330,000 | - | - | |||||||||||||||
John
V. BiVona (40)
|
250,000 | * | 250,000 | - | - | |||||||||||||||
Maxim
Group LLC (41)
|
965,134 | 1.7 | % | 965,134 | - | - | ||||||||||||||
Monarch
Capital Group (42)
|
65,340 | * | 65,340 | - | - | |||||||||||||||
Robert
Nathan (43)
|
152,460 | * | 152,460 | - | - | |||||||||||||||
Felix
Investments, LLC (44)
|
292,200 | * | 292,200 | - | - | |||||||||||||||
George
C. Foulkes (45)
|
30,102 | * | 30,102 | - | - | |||||||||||||||
Max
A. Schneider, Inc. (46)
|
125,242 | * | 125,242 | - | - | |||||||||||||||
Kenneth
Leonard (47)
|
150,513 | * | 150,513 | - | - | |||||||||||||||
Anthony
Morgenthau (48)
|
7,415 | * | 7,415 | - | - | |||||||||||||||
Mao
Holdings (Cayman) Limited (49)
|
400,000 | * | 400,000 | - | - | |||||||||||||||
Glenn
Baron (50)
|
90,308 | * | 90,308 | - | - | |||||||||||||||
Moty
Yekutiel (51)
|
208,553 | * | 34,607 | 173,946 | * | |||||||||||||||
Pike
Family Trust (52)
|
107,834 | * | 107,834 | - | - | |||||||||||||||
Carl
Cadwell (53)
|
642,336 | * | 144,136 | 498,200 | * | |||||||||||||||
Brian
MacDonald (54)
|
2,283,532 | 4.2 | % | 1,015,459 | 1,268,073 | 2.3 | % | |||||||||||||
W.
Hamlin Emory (55)
|
1,317,099 | 2.4 | % | 117,170 | 1,199,929 | 2.2 | % | |||||||||||||
Heartland
Value Fund (56)
|
2,340,000 | 4.3 | % | 2,340,000 | - | - | ||||||||||||||
EAC
Investment Limited Partnership (57)
|
1,766,279 | 3.3 | % | 1,766,279 | - | - | ||||||||||||||
Partner
Healthcare Offshore Fund, Ltd. Partner
Healthcare Fund, L.P. (58)
|
1,333,657 | 2.5 | % | 1,333,657 | - | - | ||||||||||||||
David
J. Zwiebel (59)
|
12,501 | * | 12,501 | - | - | |||||||||||||||
Craig
B. Swanson (60)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
David
J. Galey (61)
|
56,122 | * | 56,122 | - | - | |||||||||||||||
Bill
and Kim Woodworth (62)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Bradley
N. Rotter Self Employed Pension Plan & trust (63)
|
142,751 | * | 33,751 | 109,000 | * | |||||||||||||||
Bradley
Rotter (64)
|
500,000 | * | 100,000 | 400,000 | * | |||||||||||||||
Paul
E. von Kuster (65)
|
109,688 | * | 109,688 | - | - | |||||||||||||||
Paul
E. von Kuster, Trustee, Credit trust under will of Thomas W. von Kuster
(66)
|
55,575 | * | 55,575 | - | - | |||||||||||||||
David
R. Holbrooke (67)
|
58,500 | * | 58,500 | - | - |
67
Number of Shares
Beneficially Owned
Prior to Offering
|
Number of
|
Number of Shares
Beneficially Owned
After Offering
|
||||||||||||||||||
Name of Beneficial Owner
|
Number
|
Percentage
of Shares
Outstanding
|
Shares
Being
Offered
|
Number
|
Percentage
of Shares
Outstanding
|
|||||||||||||||
Max
A Schneider, M.D. Trust (68)
|
14,625 | * | 14,625 | - | - | |||||||||||||||
Frederick
E. Kahn, MD (69)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
Dr.
Jim Greenblatt (70)
|
187,528 | * | 187,528 | - | - | |||||||||||||||
Lawrence
M. Baill (71)
|
44,727 | * | 44,727 | - | - | |||||||||||||||
Jospeh
A. Bailey (72)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
Daniel
E. Greenblatt (73)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Fred
Ehrman (74)
|
75,000 | * | 75,000 | - | - | |||||||||||||||
Michael
T. Cullen, M.D. (75)
|
48,182 | * | 26,000 | 22,182 | * | |||||||||||||||
Crown
Jewel Ventures, LLC (76)
|
181,226 | * | 181,226 | - | - | |||||||||||||||
Itasca
Capital Partners, LLC (77)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Kerry
Judd and Susan Stillman (78)
|
10,970 | * | 10,970 | - | - | |||||||||||||||
H.
R. Swanson Revocable Trust (79)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Robert
James Blinken Jr. (80)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
Brean
Murray Carret & Co. (81)
|
1,278,657 | 2.4 | % | 1,257,650 | 21,007 | * | ||||||||||||||
Hal
F. Lewis (82)
|
32,500 | * | 32,500 | - | - | |||||||||||||||
G&A
Consulting Retirement Trust (83)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Scott
Alderton (84)
|
50,894 | * | 50,894 | - | - | |||||||||||||||
Murray
Markiles (85)
|
50,894 | * | 50,894 | - | - | |||||||||||||||
V.
Joseph Stubbs (86)
|
50,894 | * | 50,894 | - | - | |||||||||||||||
Jonathan
Hodes (87)
|
25,535 | * | 25,535 | - | - | |||||||||||||||
John
McIlvery (88)
|
25,804 | * | 25,804 | - | - | |||||||||||||||
Greg
Akselrud (89)
|
21,272 | * | 21,272 | - | - | |||||||||||||||
Scott
Galer (90)
|
17,877 | * | 17,877 | - | - | |||||||||||||||
Kevin
DeBre (91)
|
22,558 | * | 22,558 | - | - | |||||||||||||||
Ryan
Azlein (92)
|
9,430 | * | 9,430 | - | - | |||||||||||||||
AJ
Investors # 1 (93)
|
50,001 | * | 50,001 | - | - | |||||||||||||||
John
Pagnucco (94)
|
650,699 | 1.2 | % | 560,807 | 89,892 | * |
*
|
Less
than 1%
|
(1)
|
Consists
of (a) 360,000 shares of common stock (b) 180,000 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock and (c) options to acquire 585,341 shares of common
stock issuable upon the exercise of vested and exercisable
options. 360,000 shares of common stock and 180,000 shares of
common stock issuable upon exercise of warrants are being registered for
resale on this prospectus.
|
(2)
|
Consists
of (a) 98,544 shares of common stock, which includes 500 shares held by
Dr. Hoffman’s daughter (b) 12,501 shares of common stock issuable upon the
exercise of vested and exercisable warrants to purchase common stock and
(c) options to acquire 712,609 shares of common stock issuable upon the
exercise of vested and exercisable options. 98,044 shares of
common stock and 12,501 shares of common stock issuable upon exercise of
warrants are being registered for resale on this
prospectus.
|
(3)
|
Consists
of (a) 6,471,067 shares of Common Stock and (b) 2,224,988 shares of Common
Stock issuable upon the exercise of vested and exercisable warrants held
by Sail Venture Partners, LP. Sail Venture Partners, LLC is the
general partner of Sail Venture Partners, L.P.. The unanimous
vote of the managing members of Sail Venture Partners, LLC (who are Walter
Schindler, Alan Sellers, Thomas Cain, F. Henry Habicht and David B.
Jones), is required to voting and make investment decisions over the
shares held by this selling stockholder. The address of Sail
Venture Partners, L.P. is 600 Anton Blvd., Suite 1010, Costa Mesa, CA
92626.
|
68
(4)
|
Consists
of options to acquire 20,000 shares of common stock issuable upon the
exercise of vested and exercisable
options.
|
(5)
|
Consists
of (a) 8,333 shares of common stock, (b) 2,501 shares of common stock
issuable upon the exercise of warrants to purchase common stock and (c)
options to acquire 156,000 shares of common stock issuable upon the
exercise of vested and exercisable options. 8,333 shares of
common stock and 2,501 shares of common stock issuable upon exercise of
warrants are being registered for resale on this prospectus by the selling
stockholder.
|
(6)
|
Consists
of (a) 6,666,668 shares of common stock and (b) 5,666,667 shares of common
stock issuable upon the exercise of vested and exercisable warrants to
purchase common stock. The address of John Pappajohn is 2116
Financial Center, Des Moines, IA
50309.
|
(7)
|
Consists
of 13,604,612 shares of common stock and 9,560,607 shares of common stock
issuable upon the exercise of vested and exercisable options and
warrants.
|
(8)
|
Consists
of (a) 8,890,795 shares of common stock (including 540,000 shares owned by
Mr. Brandt's children and 956,164 shares held by Brandt Ventures), (b)
1,079,728 shares reserved for issuance upon exercise of warrants to
purchase common stock (including warrants to purchase 478,082 shares of
common stock held by Brandt Ventures) and (c) 1,111,459 shares reserved
for issuance upon exercise of options to purchase common stock held by Mr.
Brandt. Of these holdings, 8,890,795 shares of common stock and
1,079,728 shares of common stock reserved for issuance upon exercise of
certain warrants to purchase common stock are being registered for
resale. The address of Leonard Brandt is 28911 Via Hacienda San
Juan Capistrano CA 92675.
|
(9)
|
Consists
of 333,334 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(10)
|
Consists
of 1,080,000 shares of common stock and 540,000 shares reserved for
issuance upon exercise of warrants to purchase common
stock.
|
(11)
|
Consists
of 650,000 shares of common stock and 324,990 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(12)
|
Consists
of 333,334 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common stock. Argyris
Vassiliou, as trustee of the Ann Vassiliou Children’s Trust P2587,
exercises voting and investment authority over the shares held by this
selling stockholder.
|
(13)
|
Consists
of 66,667 shares of common stock and 33,333 shares reserved for issuance
upon exercise of warrants to purchase common stock. Andrew
Chafoulias, as Chief Manager, exercises voting and investment authority
over the shares held by this selling
stockholder.
|
(14)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. William Wu,
as President, exercises voting and investment authority over the shares
held by this selling stockholder.
|
(15)
|
Consists
of 500,000 shares of common stock and 250,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Gus
Chafoulias, as President, exercises voting and investment authority over
the shares held by this selling
stockholder.
|
(16)
|
Consists
of 180,000 shares of common stock and 90,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Paul Buck
is a financial consultant to the
company.
|
(17)
|
Consists
of 100,000 shares of common stock and 50,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(18)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(19)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(20)
|
Consists
of 513,333 shares of common stock and 256,667 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(21)
|
Consists
of 400,000 shares of common stock and 200,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
69
(22)
|
Consists
of 333,333 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(23)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(24)
|
Consists
of 924,644 shares of common stock and 386,923 shares reserved
for issuance upon exercise of warrants to purchase common stock. Dr.
Proler provides medical consulting services to the
Company.
|
(25)
|
Consists
of 513,333 shares of common stock and 256,667 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(26)
|
Consists
of 720,000 shares of common stock and 360,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(27)
|
Consists
of 720,000 shares of common stock and 360,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. The selling
stockholder is an affiliate of a broker dealer but has certified to the
company that she bought the securities being registered for resale in the
ordinary course of business, and at the time of the purchase of such
securities, had no agreements or understandings, directly or indirectly,
with any person to distribute such
securities.
|
(28)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(29)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Starr F.
Schlobohm, as trustee of the selling stockholder, exercises voting and
investment authority over the shares held by this selling
stockholder.
|
(30)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(31)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(32)
|
Consists
of 180,000 shares of common stock and 90,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Mr.
Thompson is an employee of Equity Dynamics, Inc., which has provided
advisory services to the
Company.
|
(33)
|
Consists
of 1,080,000 shares of common stock and 540,000 shares reserved for
issuance upon exercise of warrants to purchase common
stock. Mark C. Thompson & Bonita S. Thompson, as trustees,
exercise voting and investment authority over the shares held by this
selling stockholder.
|
(34)
|
Consists
of 180,000 shares of common stock and 90,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(35)
|
Consists
of 900,000 shares of common stock and 450,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Elliott
Donnelley, as President, Corporate G.P., exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(36)
|
Consists
of 333,333 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common stock. Bruce
Seyburn, as Partner, exercises voting and investment authority over the
shares held by this selling
stockholder.
|
(37)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(38)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Kevin and
Laurie Carnahan, as trustees, exercise voting and investment authority
over the shares held by this selling
stockholder.
|
(39)
|
Consists
of 220,000 shares of common stock and 110,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. Patricia J.
Jordan, as Chief Manager, exercises voting and investment authority over
the shares held by this selling
stockholder.
|
(40)
|
Consists
of 166,667 shares of common stock and 83,333 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(41)
|
Consists
of 965,134
shares reserved
for issuance upon exercise of warrants to purchase common
stock.
The
selling stockholder is a broker-dealer, and has represented to the Company
that it received its warrants to purchase common stock as compensation for
investment banking services to the Company. Michael Rabinowitz exercises
voting and investment authority over the shares held by this selling
stockholder.
|
(42)
|
Consists
of 65,340 shares reserved for issuance upon exercise of warrants to
purchase common stock. The selling stockholder is a
broker-dealer, and has represented to the company that it received its
warrants to purchase common stock as compensation for investment banking
services to the company. Michael Potter, as Chairman, exercises
voting and investment authority over the shares held by this selling
stockholder.
|
70
(43)
|
Consists
of 152,460 shares reserved for issuance upon exercise of warrants to
purchase common stock. The selling stockholder is a
broker-dealer, and has represented to the company that it received its
warrants to purchase common stock as compensation for investment banking
services to the company. The selling shareholder is also an
affiliate of a broker-dealer. The selling stockholder has
represented that it purchased or otherwise acquired the warrants in the
ordinary course of business and, at the time of such purchase/acquisition,
had no agreements or understandings, directly or indirectly, with any
person, to distribute the securities to be
resold.
|
(44)
|
Consists
of 292,200 shares reserved
for issuance upon exercise of warrants to purchase common
stock.
The
selling stockholder is a broker-dealer and has represented to the Company
that it received its warrants to purchase common stock as compensation for
investment banking services to the Company. Frank Mazzola exercises voting
and investment authority over the shares held by this selling
stockholder.
|
(45)
|
Consists
of 21,636 shares of common stock and 8,466 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(46)
|
Consists
of 125,242 shares of common stock. Max A. Schneider exercises
voting and investment authority over the shares held by this selling
stockholder.
|
(47)
|
Consists
of 108,182 shares of common stock and 42,331 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock.
|
(48)
|
Consists
of 7,415 shares of common stock issuable upon the exercise of vested and
exercisable warrants to purchase common
stock.
|
(49)
|
Consists
of 250,000 shares of common stock and 150,000 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock. Michel Clemence, Dominique Warluzel and Mansour
Ojjeh, as directors of the selling stockholder, each exercise voting and
dispositive power over the shares held by this selling
stockholder.
|
(50)
|
Consists
of 64,910 shares of common stock and 25,398 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock.
|
(51)
|
Consists
of 198,394 shares of common stock and 10,159 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock. 24,448 shares of common stock and 10,159 shares
reserved for issuance upon exercise of warrants to purchase common stock
are being registered for re-sale by the selling shareholder on this
prospectus
|
(52)
|
Consists
of 107,834 shares of common stock. John Pike, as trustee of the
selling stockholder, exercises voting and investment authority over the
shares held by this selling
stockholder.
|
(53)
|
Consists
of 600,006 shares of common stock and 42,330 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock. 101,806 shares of common stock and 42,330 shares
reserved for issuance upon exercise of warrants to purchase common stock
are being registered for re-sale by the selling shareholder on this
prospectus.
|
(54)
|
Consists
of 1,242,375 shares of common stock and 1,041,157 shares of common stock
issuable upon the exercise of vested and exercisable options to purchase
common stock. Brian MacDonald is the Chief Engineeer of the
Company. 1,015,459 shares of common stock are being registered
for re-sale by the selling shareholder on this
prospectus.
|
(55)
|
Consists
of 1,015,334 shares of common stock, 4,233 shares of common stock issuable
upon the exercise of vested and exercisable warrants to purchase common
stock and 297,532 shares of common stock issuable upon the exercise of
vested and exercisable options to purchase common
stock. 117,170 shares of common stock are being registered for
re-sale by the selling shareholder on this
prospectus.
|
(56)
|
Consists
of 1,800,000 shares of common stock and 540,000 shares reserved for
issuance upon exercise of warrants to purchase common
stock. The selling stockholder is affiliated with Alps
Distributors, Inc. a registered broker/dealer and member of
FINRA. The selling stockholder purchased or otherwise acquired
these shares in the ordinary course of business and, at the time of such
purchase/acquisition, had no agreements or understandings, directly or
indirectly, with any person, to distribute the securities to be
resold. Mr.Paul T. Beste, Vice President & Secretary of
Heartland Group Inc., exercises voting and investment authority over the
shares held by this selling
stockholder.
|
(57)
|
Consists
of 1,292,177 shares of common stock and 474,102 shares of common stock
issuable upon the exercise of warrants to purchase common
stock. Elizabeth Morgentheau, as President of the selling
stockholder, exercises voting and investment authority over the shares
held by this selling
stockholder.
|
71
(58)
|
Consists
of 651,090 shares of common stock and 195,327 shares reserved for issuance
upon exercise of certain warrants to purchase common stock held by Partner
Healthcare Fund, LP, and 374,800 shares of common stock and 112,440 shares
reserved for issuance upon exercise of warrants to purchase common stock
held by Partner Healthcare Offshore Fund, Ltd. Brian Grossman,
as the Portfolio Manager of Partner Healthcare Offshore Fund, Ltd.,
exercises voting and investment authority over the shares held by Partner
Healthcare Offshore Fund, Ltd. Brian Grossman, as the Portfolio
Manager of Partner Healthcare Fund, L.P., exercises voting and investment
authority over the shares held by Partner Healthcare Fund,
L.P.
|
(59)
|
Consists
of 12,501 shares reserved for issuance upon exercise of warrants to
purchase common stock.
|
(60)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(61)
|
Consists
of 40,891 shares of common stock and 15,231 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(62)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock. Kimberly
Craig-Woodworth and William N. Woodworth are affiliated with Brean Murray,
Carret & Co. a registered broker/dealer and member of
FINRA. Kimberly Craig-Woodworth and William N. Woodworth
purchased or otherwise acquired these shares in the ordinary course of
business and, at the time of such purchase/acquisition, had no agreements
or understandings, directly or indirectly, with any person, to distribute
the securities to be resold.
|
(63)
|
Consists
of 109,000 shares of common stock and 33,751 shares reserved for issuance
upon exercise of warrants to purchase common stock. Bradley
Rotter, Trustee of the Bradley N. Rotter Self Employed Pension Plan &
Trust, exercises voting and investment authority over the shares held by
this selling stockholder. 33,751 shares reserved for issuance
upon exercise of warrants to purchase common stock are being registered
for re-sale by the selling shareholder on this
prospectus.
|
(64)
|
Consists
of 400,000 shares of common stock and 100,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. 100,000 shares
reserved for issuance upon exercise of warrants to purchase common stock
are being registered for re-sale by the selling shareholder on this
prospectus.
|
(65)
|
Consists
of 84,375 shares of common stock and 25,313 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(66)
|
Consists
of 42,750 shares of common stock and 12,825 shares reserved for issuance
upon exercise of warrants to purchase common stock. Paul E. von
Kuster, Trustee, Credit trust under will of Thomas W. von Kuster,
exercises voting and investment authority over the shares held by this
selling stockholder.
|
(67)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(68)
|
Consists
of 11,250 shares of common stock and 3,375 shares reserved for issuance
upon exercise of warrants to purchase common stock. Max
Schneider, Trustee of the Max A Schneider, M.D. Trust, exercises voting
and investment authority over the shares held by this selling
stockholder.
|
(69)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(70)
|
Consists
of 129,028 shares of common stock and 58,500 shares reserved for issuance
upon exercise of warrants to purchase common stock. Dr.
Greenblatt is a contractor who acts as one of CNS Response, Inc.’s
Regional Medical Directors and in this capacity, among other things,
trains physicians in the use of
rEEG.
|
(71)
|
Consists
of 32,886 shares of common stock and 11,841 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(72)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common stock. Mr. Bailey
is affiliated with Brean Murray, Carret & Co., LLC, a registered
broker/dealer and member of FINRA, as he is an employee of Brean Murray,
Carret & Co., LLC. Mr. Bailey purchased or otherwise
acquired his shares in the ordinary course of business and, at the time of
such purchase/acquisition, had no agreements or understandings, directly
or indirectly, with any person, to distribute the securities to be
resold.
|
(73)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
72
(74)
|
Consists
of 75,000 shares reserved for issuance upon exercise of warrants to
purchase common stock. Mr. Ehrman is affiliated with Brean Murray, Carret
& Co. a registered broker/dealer and member of FINRA. Mr.
Ehrman purchased or otherwise acquired his shares in the ordinary course
of business and, at the time of such purchase/acquisition, had no
agreements or understandings, directly or indirectly, with any person, to
distribute the securities to be
resold.
|
(75)
|
Consists
of 42,182 shares of common stock and 6,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. 20,000
shares of common stock and 6,000 shares reserved for issuance upon
exercise of warrants to purchase common stock are being registered for
re-sale by the selling shareholder on this
prospectus.
|
(76)
|
Consists
of 131,807 shares of common stock and 49,419 shares reserved for issuance
upon exercise of warrants to purchase common stock. Sharon
Keene exercises voting and investment authority over the shares held by
this selling stockholder.
|
(77)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock. Michael S.
Wallace, the Managing Member of Itasca Capital Partners, LLC, exercises
voting and investment authority over the shares held by this selling
stockholder.
|
(78)
|
Consists
of 8,438 shares of common stock and 2,532 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(79)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock. H. R.
Swanson, Trustee of the H. R. Swanson Rev. Trust, exercises voting and
investment authority over the shares held by this selling
stockholder.
|
(80)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(81)
|
Consists
of 641,472 shares of common stock and 637,185 shares reserved for issuance
upon exercise of warrants to purchase common stock. Brean
Murray, Carret & Co., LLC is a FINRA member firm. Brean
Murray, Carret & Co., LLC purchased or otherwise acquired its shares
in the ordinary course of business and, at the time of such
purchase/acquisition, had no agreements or understandings, directly or
indirectly, with any person, to distribute the securities to be
resold. William McCluskey, President and Chief Executive
Officer of Brean Murray, Carret & Co., LLC, exercises voting and
investment authority over the shares held by this selling
stockholder. 633,138 shares of common stock and 624,512 shares
reserved for issuance upon exercise of warrants to purchase common stock
are being registered for re-sale by the selling shareholder on this
prospectus.
|
(82)
|
Consists
of 25,000 shares of common stock and 7,500 shares reserved for issuance
upon exercise of warrants to purchase common stock. Mr. Lewis
is affiliated with a registered broker/dealer and member of
FINRA. Mr. Lewis purchased or otherwise acquired his shares in
the ordinary course of business and, at the time of such
purchase/acquisition, had no agreements or understandings, directly or
indirectly, with any person, to distribute the securities to be
resold.
|
(83)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock. Gary Gossard, as
Trustee of the G&A Consulting Retirement Trust, exercises voting and
investment authority over the shares held by this selling
stockholder.
|
(84)
|
Consists
of 36,096 shares of common stock and 14,798 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(85)
|
Consists
of 36,096 shares of common stock and 14,798 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(86)
|
Consists
of 36,096 shares of common stock and 14,798 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(87)
|
Consists
of 18,456 shares of common stock and 7,079 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(88)
|
Consists
of 18,624 shares of common stock and 7,180 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(89)
|
Consists
of 15,518 shares of common stock and 5,754 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
73
(90)
|
Consists
of 12,869 shares of common stock and 5,008 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(91)
|
Consists
of 16,371 shares of common stock and 6,187 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(92)
|
Consists
of 7,254 shares of common stock and 2,176 shares reserved for issuance
upon exercise of warrants to purchase common
stock.
|
(93)
|
Consists
of 50,001 shares reserved for issuance upon exercise of warrants to
purchase common stock. Adam Katz, as Partner of AJ Investors
#1, exercises voting and investment authority over the shares held by this
selling stockholder.
|
(94)
|
Consists
of 306,748 shares of common stock and 214,951 shares reserved for issuance
upon exercise of warrants to purchase common stock held by John Pagnucco;
75,000 shares of common stock and 45,000 shares reserved for issuance upon
exercise of warrants to purchase common stock held by John W. Pagnucco
1998 Rollover Roth IRA RBC Dain; and 9,000 shares of common stock held by
John Pagnucco as custodian for his grandchildren over which John Pagnucco
exercises voting and dispositive control. Of these holdings, 225,856
shares of common stock and 214,951 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock held by John
Pagnucco and 75,000 shares of common stock and 45,000 shares of common
stock reserved for issuance upon exercise of warrants to purchase common
stock held by John W Pagnucco 1998 Rollover Roth IRA RBC Dain are being
registered for resale sale on this
prospectus.
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74
RELATED
PARTY TRANSACTIONS
Certain
Relationships and Related Transactions
Except as
follows, since October 1, 2007, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we are or
will be a party:
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in
which the amount involved exceeds the lesser of $120,000 or 1% of the
average of our total assets at year-end for the last two completed fiscal
years; and
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·
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in
which any director, executive officer, other stockholders of more than 5%
of our common stock or any member of their immediate family had or will
have a direct or indirect material
interest.
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Transactions
with George Carpenter
On
December 24, 2009, the Company completed a second closing of its private
placement in which it received gross proceeds of approximately $3 million, which
included $108,000 invested by Mr. Carpenter. In exchange
for his investment, the Company issued to Mr. Carpenter 360,000 shares of its
common stock and a five year non-callable warrant to purchase 180,000 shares of
its common stock at an exercise price of $0.30 per share. This
investment was completed with the identical terms as received by all other
investors in the Company’s private placement closings that took place on August
26, 2009, December 24, 2009, December 31, 2009 and January 4, 2010.
Transactions
with SAIL Venture Partners LP
On March
30, 2009, we executed two senior secured convertible promissory notes each in
the principal amount of $250,000 with SAIL Venture Partners, LP (“SAIL”) and
Brandt Ventures, GP (“Brandt”). David Jones, a member of our board of directors,
is one of four managing members of Sail Venture Partners, LLC, which is the
general partner of SAIL. Leonard Brandt, also a member of our board of directors
until December 3, 2009 and our former Chief Executive Officer, is the general
partner of Brandt.
These
notes accrue interest at the rate of 8% per annum and are due and payable upon a
declaration by the note holder(s) requesting repayment, unless sooner converted
into shares of our common stock (as described below), upon the earlier to occur
of: (i) June 30, 2009 or (ii) an Event of Default (as defined in the notes),
which includes the default that occurred as a result of Mr. Brandt no longer
serving as our Chief Executive Officer effective as of April 10, 2009. The notes
are secured by a lien on substantially all of our assets (including all
intellectual property). In the event of a liquidation, dissolution or winding up
of the company, unless Brandt and/or SAIL informs us otherwise, we shall pay
such investor an amount equal to the product of 250% multiplied by the principal
and all accrued but unpaid interest outstanding on the note.
In
concert with an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), the principal and all accrued, but
unpaid interest outstanding under the notes shall be automatically converted
into the securities issued in the equity financing by dividing such amount by
90% of the per share price paid by the investors in such financing.
On May
14, 2009, we entered into a Bridge Note and Warrant Purchase Agreement with
SAIL.
75
Pursuant
to the Purchase Agreement, on May 14, 2009, SAIL purchased a Secured Promissory
Note in the principal amount of $200,000 from us. In order to induce SAIL to
purchase the note, we issued to SAIL a warrant to purchase up to 100,000 shares
of our common stock at a purchase price equal to $0.25 per share. The warrant
expires on the earlier to occur of May 31, 2016 or a change of control of the
company.
The
Purchase Agreement also provides that, at any time on or after June 30, 2009,
and provided that certain conditions are satisfied by us, SAIL will purchase
from us a second Secured Convertible Promissory Note in the principal sum of
$200,000 and will be issued a second warrant identical in terms to the warrant
described above. The aforementioned conditions include our entry into a term
sheet in which investors commit to participate in an equity financing by us of
not less than $2,000,000 (excluding any and all other debt that are to be
converted).
The notes
issued or issuable pursuant to the Purchase Agreement accrue interest at the
rate of 8% per annum and are due and payable, unless sooner converted into
shares of our common stock (as described below), upon the earlier to occur of:
(i) a declaration by SAIL on or after June 30, 2009 or (ii) an Event of Default
as defined in the notes. The note(s) are secured by a lien on substantially all
of our assets (including all intellectual property). In the event of a
liquidation, dissolution or winding up of the company, unless SAIL informs us
otherwise, we shall pay SAIL an amount equal to the product of 250% multiplied
by the principal and all accrued but unpaid interest outstanding on the
note(s).
In the
event we consummate an equity financing transaction of at least $1,500,000
(excluding any and all other debt that is converted), then the principal and all
accrued, but unpaid interest outstanding under the note(s) shall be
automatically converted into the securities issued in the equity financing by
dividing such amount by 85% of the per share price paid by the investors in such
financing.
In
addition, in the event we issue preferred stock that is not part of an equity
financing described above, SAIL may, at its option, convert the principal and
all accrued, but unpaid interest outstanding under the note(s) into preferred
stock by dividing such amount by 85% of the per share price paid by the
purchasers’ of our preferred stock.
On August
26, 2009, the Company completed an equity financing transaction of approximately
$2 million. As a result of the financing, each of the notes described above that
were held by SAIL and Brandt automatically converted into common stock, with
SAIL receiving 1,758,356 shares and Brandt receiving 956,164 shares. In
addition, pursuant to the terms of the notes, SAIL was issued a non-callable
five year warrant to purchase 879,178 shares of common stock at an exercise
price of $0.30 per share and Brandt was issued a non-callable five year warrant
to purchase 478,082 shares of common stock at an exercise price of $0.30 per
share.
In
connection with the equity financing referred to above, on August 26, 2009, SAIL
purchased 6 Units for $324,000. Each Unit consists of 180,000 shares of common
stock and a five year non-callable warrant to purchase an additional 90,000
shares of common stock at an exercise price of $0.30 per share. The shares of
common stock and warrants comprising the Units are immediately separable and
were issued separately. This investment was completed with the
identical terms as received by all other investors in the Company’s private
placement closings that took place on August 26, 2009, December 24, 2009,
December 31, 2009 and January 4, 2010.
76
Transactions
with Leonard Brandt
Please
see the discussion above under the heading “Transaction with Sail Venture
Partners LP” for a summary of a bridge financing transaction which closed
on March 30, 2009, in which Mr. Brandt participated.
Transactions
with Henry Harbin, M.D.
Since
June 2007, Dr. Harbin has acted as a strategic advisor to the company, and has
advised us on our marketing initiatives. As compensation for his services as an
advisor, on August 8, 2007, we granted Dr. Harbin a non-qualified option to
purchase 24,000 shares of our common stock at an exercise price of $1.09 per
share. Options to purchase 6,000 shares vested on the date of grant, and the
remaining 18,000 shares vested in equal installments of 2,000 shares on each
monthly anniversary of the grant date for a period of nine months.
Subsequently,
on April 15, 2008, we entered into a consulting agreement which expired on
December 31, 2008 pursuant to which Dr. Harbin was paid an aggregate of $24,000
and was granted options to purchase 56,000 shares of our common stock at an
exercise price of $0.96 per share, with options to purchase 14,000 shares
vesting on the date of grant, options to purchase 37,328 shares vesting in eight
equal monthly installments of 4,666 options commencing on April 30, 2008, and
the remaining options to purchase 4,672 shares vesting on December 31,
2008.
Most
recently, on March 17, 2009, we entered into a consulting agreement with Dr.
Harbin which expired on December 31, 2009 pursuant to which Dr. Harbin was paid
an aggregate of $24,000 as compensation for his consulting
services. In addition, as further compensation, we granted Dr. Harbin
options to purchase 56,000 shares of our common stock at an exercise price of
$0.40 per share, with the option vesting in equal monthly installments over a
twelve month period commencing on January 1, 2009.
Transactions
with Daniel Hoffman
On
January 11, 2008, we, through our wholly owned subsidiary, Colorado CNS
Response, Inc. and pursuant to the terms of a Stock Purchase Agreement, acquired
all of the outstanding common stock of Neuro-Therapy Clinic, PC, a Colorado
professional medical corporation wholly owned by Dr. Hoffman ("NTC") in exchange
for a non-interest bearing note of $300,000 payable in equal monthly
installments over 36 months. At the time of the transaction, NTC was
our largest customer. Upon the completion of the acquisition, Dr.
Hoffman was appointed our Chief Medical Officer. The Stock Purchase
Agreement provides that upon the occurrence of certain events, as defined in the
purchase agreement, Dr. Hoffman has a repurchase option for a period of three
years subsequent to the closing, as well as certain rights of first refusal, in
relation to the assets and liabilities we acquired.
In
addition, Dr. Hoffman has acted as a consultant to the corporation on various
matters since 2003. Subsequent to October 1, 2007, Dr. Hoffman has received cash
payments of $15,000 in consideration for his consulting services to us prior to
joining us as our Chief Medical Officer.
Transactions
with John Pappajohn
In
conjunction with the closing of the Company’s private placement on August 26,
2009, Mr. Pappajohn joined the Company’s Board of Directors. On
September 29, 2009 at the Company’s Annual Meeting of shareholders, Mr.
Pappajohn’s directorship was approved by a majority vote of the shareholders of
the Company.
77
On June
12, 2009, we entered into a Bridge Note and Warrant Purchase Agreement with Mr.
John Pappajohn (“Pappajohn”).
Pursuant
to the Purchase Agreement, on June 12, 2009, Pappajohn purchased a Secured
Convertible Promissory Note in the principal amount of $1,000,000 from
us. In order to induce Pappajohn to purchase the note, we issued to
Pappajohn a warrant to purchase up to 3,333,333 shares of our common stock at a
purchase price equal to $0.30 per share. The warrant expires on June
30, 2016.
The note
issued pursuant to the Purchase Agreement provides that the principal amount of
$1,000,000 together with a single Premium Payment of $90,000 which is due and
payable, unless sooner converted into shares of our common stock (as described
below), upon the earlier to occur of: (i) a declaration by Pappajohn on or after
June 30, 2010 or (ii) an Event of Default as defined in the note. The
note is secured by a lien on substantially all of our assets
(including all intellectual property). In the event of a liquidation,
dissolution or winding up of the company, unless Pappajohn informs us otherwise,
we shall pay Pappajohn an amount equal to the product of 250% multiplied by the
then outstanding principal amount of the note and the Premium
Payment.
In the
event we consummate an equity financing transaction of at least $1,500,000
(excluding any and all other debt that is converted), the then outstanding
principal amount of the note (but excluding the Premium Payment, which will be
repaid in cash at the time of such equity financing) shall be automatically
converted into the securities issued in the equity financing by dividing such
amount by the per share price paid by the investors in such
financing.
On August
26, 2009, the Company completed an equity financing transaction of approximately
$2 million. As a result of the financing, the note described above
held by Mr. Pappajohn automatically converted into common stock, with Mr.
Pappajohn receiving 3,333,334 shares. In addition, pursuant to the
terms of the note, Mr. Pappajohn received a five year non-callable warrant to
purchase 1,666,667 shares of common stock at an exercise price of $0.30 per
share.
In
connection with the equity financing referred to above, on August 26, 2009, Mr.
Pappajohn invested an additional $1,000,000 in the Company. In
exchange for his investment, the Company issued an additional 3,333,3334 shares
of common stock to Mr. Pappajohn and a five year non-callable warrant to
purchase 1,666,667 shares of common stock at an exercise price of $0.30 per
share. This investment was completed with the identical terms as
received by all other investors in the Company’s private placement closings that
took place on August 26, 2009, December 24, 2009, December 31, 2009 and January
4, 2010.
The
Company intends to reimburse Equity Dynamics, Inc., a company solely owned by
Mr. Pappajohn, for expenses which Equity Dynamics incurred between May and
December, 2009 on behalf of CNS Response, Inc. These expenses include
$34,700 incurred in connection with the Company’s private placement financing
activities.
Transactions
with Promoters and Control Persons
Prior to
our merger with CNS California, which closed on March 7, 2007, Strativation,
Inc. (now called CNS Response, Inc.) existed as a "shell company" with nominal
assets whose sole business was to identify, evaluate and investigate various
companies to acquire or with which to merge.
78
Shares
for Debt Agreement
Prior to
our merger with CNS California, on January 11, 2007, we entered into a Shares
For Debt Agreement with Richardson & Patel LLP ("R&P"), our former legal
counsel, pursuant to which we agreed to issue and R&P agreed to accept
645,846 restricted shares of our common stock (the "Shares") as full and
complete settlement of a portion of the total outstanding debt in the amount of
$261,202 that we owed to R&P for legal services (the "Partial Debt"). On
January 15, 2007, the company and R&P agreed to amend and restate the Shares
for Debt Agreement to increase the number of Shares to be issued in settlement
of such Partial Debt to 656,103 restricted shares of our common stock, which
then represented 75.5% of our issued and outstanding common stock.
Registration
Rights Agreement
On
January 11, 2007, we entered into a Registration Rights Agreement in connection
with the above referenced Shares For Debt Agreement with R&P and various
other stockholders of the Company signatory thereto ("Majority Stockholders") in
connection with the shares of the company acquired pursuant to the Shares For
Debt Agreement and certain other transactions that took place on or around July
18, 2006. On January 15, 2007, the company and the Majority Stockholders agreed
to amend and restate the Registration Rights Agreement to provide registration
rights to the Majority Stockholders for up to 767,101 shares of our common stock
held or to be acquired by them.
Merger
Agreement
On
January 16, 2007, we entered into an Agreement and Plan of Merger with CNS
Response, Inc., a California corporation (or CNS California), and CNS Merger
Corporation, a California corporation and our wholly-owned subsidiary that was
formed to facilitate the acquisition of CNS California. On March 7, 2007, the
merger with CNS California closed, CNS California became our wholly-owned
subsidiary, and we changed our name from Strativation, Inc. to CNS Response,
Inc.. At the Effective Time of the Merger (as defined in the Merger
Agreement, as amended on February 23, 2007), MergerCo was merged with and into
CNS California, the separate existence of MergerCo ceased, and CNS California
continued as the surviving corporation at the subsidiary level. We issued an
aggregate of 17,744,625 shares of our common stock to the stockholders of CNS
California in exchange for 100% ownership of CNS California. Additionally, we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase shares of common stock on the same terms and conditions as
previously issued by CNS California. Pursuant to the Merger Agreement, our
former sole director and executive officer, Silas Phillips, resigned as a
director and executive officer of our company effective as of the closing of the
merger, and the directors and officers of CNS California were appointed to serve
as directors and officer of our company. Except for the Merger Agreement, as
amended, and the transactions contemplated by that agreement, neither CNS
California, nor the directors and officers of CNS California serving prior to
the consummation of the Merger, nor any of their associates, had any material
relationship with us, or any of our directors and officers, or any of our
associates prior to the merger. Following the merger, the business conducted by
the company is the business conducted by CNS California.
Pursuant
to the terms of the Merger Agreement, we paid an advisory fee of $475,000 to
Richardson & Patel, LLP, our former legal counsel and a principal
shareholder, immediately upon the closing of the merger.
79
DESCRIPTION
OF CAPITAL STOCK
The
information set forth below is a general summary of our capital stock structure.
As a summary, this Section is qualified by, and not a substitute for, the
provisions of our Certificate of Incorporation, as amended, and
Bylaws.
Authorized
Capital Stock
Our
authorized capital stock consists of 750,000,000 shares of Common Stock, par
value $0.001 per share.
Common
Stock
As of
January 15, 2010, we had 53,567,795 shares of Common Stock issued and
outstanding. In addition, we have reserved 6,662,014 shares of Common Stock for
issuance in respect of options to purchase common stock and 22,631,086 shares of
Common Stock were reserved for issuance pursuant to issued and outstanding
warrants to purchase our Common Stock.
Dividend
Rights
The
holders of outstanding shares of Common Stock are entitled to receive dividends
out of funds legally available at the times and in the amounts that our Board
may determine.
Voting
Rights
Each
holder of Common Stock is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders.
No
Preemptive or Similar Rights
Holders
of Common Stock do not have preemptive rights, and Common Stock is not
convertible or redeemable.
Right
to Receive Liquidation Distributions
Upon our
dissolution, liquidation or winding-up, the assets legally available for
distribution to our stockholders are distributable ratably among the holders of
Common Stock.
Warrants
At January 15, 2010, the following
warrants were outstanding:
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warrants
that will expire at various times through 2012 to purchase an aggregate of
189,146 shares of our common stock at an exercise price per share of
$0.01, which were granted in connection with the issuance of convertible
promissory notes;
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warrants
that will expire at various times through 2015 to purchase an aggregate of
1,427,022 shares of our common stock at an exercise price per share of
$0.59 which were granted in connection with the issuance of convertible
promissory notes;
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80
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warrants
that will expire at various times through 2011 to purchase an aggregate of
1,143,587 shares of our common stock at an exercise price per share of
$1.51 which were issued to investors in connection with the private
placement completed in November
2006;
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warrants
that will expire in 2011 to purchase 7,921 shares of our common stock at
an exercise price per share of $1.01 which were granted to the placement
agent in connection with the private placement completed in November
2006;
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warrants
that will expire in 2011 to purchase an aggregate of 4,752 shares of our
common stock at an exercise price per share of $1.812 which were granted
to the placement agent in connection with the private placement completed
in November 2006;
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warrants
that will expire in 2012 to purchase 1,951,445 shares of our common stock
at an exercise price per share of $1.80 which were issued to investors in
connection with the private placement which was completed concurrently
with the Merger on March 7, 2007;
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warrants
that will expire in 2012 to purchase 520,380 shares of our common stock at
an exercise price per share of $1.44 which were issued to the placement
agent in connection with the private placement which was completed
concurrently with the Merger on March 7,
2007;
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warrants
that will expire in 2012 to purchase 156,114 shares of our common stock at
an exercise price per share of $1.80 which were issued to the placement
agent in connection with the private placement which was completed
concurrently with the Merger on March 7,
2007.
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warrants
that will expire in 2016 to purchase 100,000 shares of our common stock at
an exercise price per share of $0.25 which were issued to SAIL Venture
Partners, LLC in connection with the a bridge note of $200,000 which was
executed on May 14, 2009.
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warrants
that will expire in 2016 to purchase 3,333,333 shares of our common stock
at an exercise price per share of $0.30 which were issued to Mr. John
Pappajohn in connection with the a bridge note of $1,000,000 which was
executed on June 12, 2009.
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warrants
that will expire in 2014 through January 2015 to purchase 12,322,252
shares of our common stock at an exercise price per share of $0.30 which
were issued to investors who participated in our private placement in
which we raised gross proceeds of $5,579,000 between August, 2009 and
January 2010.
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warrants
that will expire in 2014 through January 2015 to purchase 1,475,134 shares
of our common stock at an exercise price per share of $0.33 which were
issued to the placement agents in connection with the private placement in
which we raised gross proceeds of $5,579,000 between August 2009 and
January 2010.
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Options
On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the “Stock Option Plan”). The Stock Option Plan provides for the issuance of
awards in the form of restricted shares, stock options (which may constitute
incentive stock options (ISO) or non-statutory stock options (NSO)), stock
appreciation rights and stock unit grants to eligible employees, directors and
consultants and is administered by the board of directors. A total of 10 million
shares of stock are reserved for issuance under the Stock Option
Plan. As of January 15, 2010, 2,124,740 options were exercised,
6,662,014 options and 183,937 restricted shares were outstanding under the 2006
Plan and 1,029,309 shares were available for issuance of awards. In
connection with this offering the Company expects to either increase the number
of shares authorized under the Stock Option Plan or create a new stock option
plan under nearly identical terms.
81
The
option price for each share of stock subject to an option shall be (i) no less
than the fair market value of a share of stock on the date the option is
granted, if the option is an ISO, or (ii) no less than 85% of the fair market
value of the stock on the date the option is granted, if the option is a NSO;
provided, however, if the option is an ISO granted to an eligible employee who
is a 10% shareholder, the option price for each share of stock subject to such
ISO shall be no less than 110% of the fair market value of a share of stock on
the date such ISO is granted. Stock options have a maximum term of ten years
from the date of grant, except for ISOs granted to an eligible employee who is a
10% shareholder, in which case the maximum term is five years from the date of
grant. ISOs may be granted only to eligible employees. The Company has adopted
ASC 718-20 (formerly, SFAS No. 123R - revised 2004, “Share-Based Payment”), and
related interpretations. Under ASC 718-20, share-based compensation cost is
measured at the grant date based on the calculated fair value of the award. The
Company estimates the fair value of each option on the grant date using the
Black-Scholes model. The expense is recognized over the employees’ or
service provider’s requisite service period, generally the vesting period of the
award. Total unrecognized compensation expense as of September 30,
2009 amounted to $1,094,100. The following is a summary of the status
of options outstanding at January 15, 2010:
Exercise Price
|
Number of Shares
|
Weighted Average
Contractual Life
|
Weighted
Average
Exercise Price
|
|||||||
$
|
0.12 | 859,270 |
10
years
|
$ | 0.12 | |||||
$
|
0.132
|
987,805 |
7 years
|
$ | 0.132 | |||||
$
|
0.30
|
135,700 |
10
years
|
$ | 0.30 | |||||
$
|
0.59
|
28,588 |
10
years
|
$ | 0.59 | |||||
$
|
0.80
|
140,000 |
10
years
|
$ | 0.80 | |||||
$
|
0.89
|
968,875 |
10
years
|
$ | 0.89 | |||||
$
|
0.96
|
496,746 |
10
years
|
$ | 0.96 | |||||
$
|
1.09
|
2,614,232 |
10
years
|
$ | 1.09 | |||||
$
|
1.20
|
333,611 |
5 years
|
$ | 1.20 | |||||
$
|
0.51
|
41,187 |
10
Years
|
$ | 0.51 | |||||
$
|
0.40
|
56,000 |
10
Years
|
$ | 0.40 | |||||
|
Total
|
6,662,014 | $ | 0.76 |
Anti-Takeover
Provisions
Delaware
has enacted the following legislation that may deter or frustrate takeovers of
Delaware corporations, such as CNS Response:
Section 203 of the Delaware General
Corporation Law. Section 203 provides, with some exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of the person, who is an
“interested stockholder” for a period of three years from the date that the
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation’s board of directors and by the holders of at least 66 2/3% of the
corporation’s outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An “interested
stockholder” is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
82
Authorized but Unissued
Stock. The authorized but unissued shares of our common stock
are available for future issuance without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offering to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
may enable our Board to issue shares of stock to persons friendly to existing
management, which may deter or frustrate a takeover of the company.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company. The address of American Stock Transfer &
Trust Company is 59 Maiden Lane, New York, New York, and the phone number is
(718) 921-8201.
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters.
The
Company’s shares trade on the Nasdaq Over-the-Counter bulletin board market (OTC
BB) under the symbol CNSO.OB. These shares are very thinly traded,
with an average daily volume for the twelve months ended September 30, 2009 of
350 shares per day with no trades occurring on 215 out of 252 trading
days. Consequently, management believes that the prices quoted on the
OTC BB may not accurately reflect the value of the Company’s common
shares. In addition, certain members of management have made open
market purchases of the Company’s shares, including approximately 500 shares as
recently as February 20, 2009.
We have
never paid dividends on our common stock. CNS California has never
paid dividends on its common stock. We intend to retain any future
earnings for use in our business.
83
PLAN
OF DISTRIBUTION
We are
registering the shares of common stock on behalf of the selling security
holders. The shares covered by this prospectus may be offered and sold from time
to time by the selling stockholders. The term “selling stockholder” includes
pledgees, donees, transferees or other successors in interest selling shares
received after the date of this prospectus from each selling stockholder as a
pledge, gift, partnership distribution or other non-sale related transfer. The
number of shares beneficially owned by a selling stockholder will decrease as
and when it effects any such transfers. The plan of distribution for the selling
stockholders’ shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be selling
stockholders hereunder. To the extent required, we may amend and supplement this
prospectus from time to time to describe a specific plan of
distribution.
The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholders
may make these sales at prices and under terms then prevailing or at prices
related to the then current market price. The selling stockholders may also make
sales in negotiated transactions. The selling stockholders may offer their
shares from time to time pursuant to one or more of the following
methods:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
one
or more block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the
transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
publicly
or privately negotiated
transactions;
|
|
·
|
through
underwriters, brokers or dealers (who may act as agents or principals) or
directly to one or more purchasers;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
In
connection with distributions of the shares or otherwise, the selling
stockholders may:
|
·
|
enter
into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the shares in the
course of hedging the positions they
assume;
|
|
·
|
sell
the shares short and redeliver the shares to close out such short
positions;
|
|
·
|
enter
into option or other transactions with broker-dealers or other financial
institutions which require the delivery to them of shares offered by this
prospectus, which they may in turn resell;
and
|
|
·
|
pledge
shares to a broker-dealer or other financial institution, which, upon a
default, they may in turn resell.
|
84
In
addition to the foregoing methods, the selling stockholders may offer their
shares from time to time in transactions involving principals or brokers not
otherwise contemplated above, in a combination of such methods or described
above or any other lawful methods. The selling stockholders may also transfer,
donate or assign their shares to lenders, family members and others and each of
such persons will be deemed to be a selling stockholder for purposes of this
prospectus. The selling stockholders or their successors in interest may from
time to time pledge or grant a security interest in some or all of the shares of
common stock, and if the selling stockholders default in the performance of
their secured obligations, the pledgees or secured parties may offer and sell
the shares of common stock from to time under this prospectus; provided however
in the event of a pledge or then default on a secured obligation by the selling
stockholder, in order for the shares to be sold under this registration
statement, unless permitted by law, we must distribute a prospectus supplement
and/or amendment to this registration statement amending the list of selling
stockholders to include the pledgee, secured party or other successors in
interest of the selling stockholder under this prospectus.
The
selling stockholders may also sell their shares pursuant to Rule 144 under the
Securities Act, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions.
Sales
through brokers may be made by any method of trading authorized by any stock
exchange or market on which the shares may be listed or quoted, including block
trading in negotiated transactions. Without limiting the foregoing, such brokers
may act as dealers by purchasing any or all of the shares covered by this
prospectus, either as agents for others or as principals for their own accounts,
and reselling such shares pursuant to this prospectus. The selling stockholders
may effect such transactions directly, or indirectly through underwriters,
broker-dealers or agents acting on their behalf. In effecting sales,
broker-dealers or agents engaged by the selling stockholders may arrange for
other broker-dealers to participate. Broker-dealers or agents may receive
commissions, discounts or concessions from the selling stockholders, in amounts
to be negotiated immediately prior to the sale (which compensation as to a
particular broker-dealer might be in excess of customary commissions for routine
market transactions).
In
offering the shares covered by this prospectus, the selling stockholders, and
any broker-dealers and any other participating broker-dealers who execute sales
for the selling stockholders, may be deemed to be “underwriters” within the
meaning of the Securities Act in connection with these sales. Any profits
realized by the selling stockholders and the compensation of such broker-dealers
may be deemed to be underwriting discounts and commissions.
The
Company is required to pay all fees and expenses incident to the registration of
the shares.
The
Company has agreed to indemnify the selling stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.
Each of
Maxim Group LLC, Monarch Capital Group, Robert Nathan, and Felix Investments,
LLC are registered broker dealers and FINRA members and are listed as selling
shareholders in this prospectus. Maxim Group LLC served as lead placement agent
in our recently completed private placement offering, and received, in addition
to cash commissions and a non-accountable expense allowance, warrants to
purchase an aggregate of 965,134 shares of our Common Stock with an exercise
price of $0.33 per share. Monarch Capital Group, Robert Nathan and Felix
Investments, LLC also acted as placement agents in our recently completed
private placement. In addition to cash commissions and a
non-accountable expense allowance, each placement agent received warrants to
purchase shares of our Common Stock at an exercise price of $0.33 per share,
with Monarch Capital Group receiving 65,340 warrants, Robert Nathan receiving
152,460 warrants and Felix Investments, LLC receiving 292,200
warrants. The registration statement of which this prospectus forms a
part includes the shares underlying the warrants held by Maxim Group LLC,
Monarch Capital Group, Robert Nathan and Felix Investments, LLC.
The
warrants held by each placement agent expire between February 26, 2015 and
January 4, 2015, corresponding to five years and six months after the closing of
each tranche of the private placement. All shares of Common Stock issued or
issuable upon conversion of placement agent warrants received by each placement
agent are restricted from sale, transfer, assignment, pledge or hypothecation or
from being the subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the
effective date of the registration statement of which this prospectus forms a
part, except transfers of the warrants to officers or partners each respective
placement agent as allowed under FINRA Rule 5110 (g)(1) and (2).
Maxim
Group LLC has indicated to us its willingness to act as selling agent on behalf
of certain of the selling shareholders named in the prospectus under the section
titled "Selling Security Holders" that purchased our privately placed
securities. All shares sold, if any, on behalf of selling shareholders by Maxim
Group LLC would be in transactions executed by Maxim Group LLC on an agency
basis and commissions charged to its customers in connection with each
transaction shall not exceed a maximum of 5% of the gross proceeds. Maxim Group
LLC does not have an underwriting agreement with us and/or the selling
shareholders and no selling shareholders are required to execute transactions
through Maxim Group LLC. Further, other than any existing brokerage relationship
as customers with Maxim Group LLC, no selling shareholder has any pre-arranged
agreement, written or otherwise, with Maxim Group LLC to sell their securities
through Maxim Group LLC.
FINRA
Rule 5110 requires members firms (unless an exemption applies) to satisfy the
filing requirements of Rule 5110 in connection with the resale, on behalf of
selling shareholders, of the securities on a principal or agency basis. NASD
Notice to Members 88-101 states that in the event a selling shareholder intends
to sell any of the shares registered for resale in this prospectus through a
member of FINRA participating in a distribution of our securities, such member
is responsible for insuring that a timely filing, if required, is first made
with the Corporate Finance Department of FINRA and disclosing to FINRA the
following:
|
·
|
it
intends to take possession of the registered securities or to facilitate
the transfer of such certificates;
|
|
·
|
the
complete details of how the selling shareholders' shares are and will be
held, including location of the particular
accounts;
|
|
·
|
whether
the member firm or any direct or indirect affiliates thereof have entered
into, will facilitate or otherwise participate in any type of payment
transaction with the selling shareholders, including details regarding any
such transactions; and
|
|
·
|
in
the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of FINRA
or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
FINRA for review.
|
No FINRA
member firm may receive compensation in excess of that allowable under FINRA
rules, including Rule 5110, in connection with the resale of the securities by
the selling shareholders, which total compensation may not exceed
8%.
85
LEGAL
MATTERS
Stubbs
Alderton & Markiles, LLP (“SAM LLP”), has provided legal services to us in
connection with its preparation of the registration statement covering the
securities offered by this prospectus. In addition, SAM LLP has rendered a legal
opinion, attached hereto as Exhibit 5.1, as to the validity of the shares of the
common stock to be registered hereby. SAM LLP was the holder of
61,880 shares of common stock and warrants to purchase 37,128 shares of common
stock at an exercise price of $1.51 of CNS Response, Inc., a California
corporation, which converted into 61,880 shares of our common stock and warrants
to purchase 37,128 shares of our common stock at an exercise price of $1.51 upon
the closing of the merger on March 7, 2007. In addition, SAM Venture
Partners invested $162,600 in the Private Placement that closed on March 7,
2007, and in exchange received 135,500 shares of our common stock, and warrants
to purchase 40,650 shares of our common stock at an exercise price of $1.81 per
share. Subsequent to the Private Placement, SAM Venture Partners
distributed the aforementioned shares and warrants to its partners, each of whom
is a partner in SAM LLP.
EXPERTS
The
consolidated financial statements included in this prospectus have been audited
by Cacciamatta Accountancy Corporation, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein, and are included in reliance on such reports given
upon the authority of said firm as experts in auditing and
accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. We have also filed with the SEC under the Securities
Act a registration statement on Form S-1 with respect to the common stock
offered by this prospectus. This prospectus, which constitutes part of the
registration statement, does not contain all the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement, portions of which are omitted as permitted by the rules
and regulations of the SEC. Statements made in this prospectus regarding the
contents of any contract or other document are summaries of the material terms
of the contract or document. With respect to each contract or document filed as
an exhibit to the registration statement, reference is made to the corresponding
exhibit. For further information pertaining to us and the common
stock offered by this prospectus, reference is made to the registration
statement, including the exhibits and schedules thereto, copies of which may be
inspected without charge at the Public Reference Room of the SEC at 100 F
Street, N.E., Washington, D.C. 20549 on official business days during the hours
of 10 a.m. to 3 p.m.. Copies of all or any portion of the
registration statement may be obtained from the SEC at prescribed
rates. Information on the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The web
site can be accessed at http://www.sec.gov. The
internet address of CNS Response is http://www.cnsresponse.com.
86
INDEX
TO FINANCIAL STATEMENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Operations for the Years Ended September 30, 2009 and
2008
|
F-3
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) for the Years
Ended September 30, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2009 and
2008
|
F-5
|
|
Notes
to Consolidated Financial Statements for the Years Ended September
30, 2009 and 2008
|
F-6
|
87
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
CNS
Response, Inc.
2755
Bristol St., Suite 285
Costa
Mesa, CA 92626
We have
audited the accompanying consolidated balance sheets of CNS Response, Inc. (the
“Company”) and its subsidiaries as of September 30, 2009 and 2008, and the
related consolidated statements of operations, changes in stockholders’ equity
(deficit), and cash flows for each of the years in the two-year period ended
September 30, 2009. CNS Response, Inc.’s management is responsible for these
financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the two-year period ended September 30, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company’s continued operating
losses and limited capital raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to this matter are
also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/
Cacciamatta Accountancy Corporation
Santa
Ana, California
December
29, 2009
F-1
CNS
RESPONSE, INC.
CONSOLIDATED
BALANCE SHEETS AT SEPTEMBER 30, 2009 and 2008
As at September 30,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$
|
988,100
|
$
|
1,997,000
|
||||
Accounts
receivable (net of allowance for doubtful accounts of $11,700 and $17,200
in 2009 and 2008 respectively)
|
61,700
|
98,200
|
||||||
Prepaids
and other
|
89,500
|
189,400
|
||||||
Total
current assets
|
1,139,300
|
2,284,600
|
||||||
Other
Assets
|
21,600
|
28,700
|
||||||
Goodwill
|
-
|
320,200
|
||||||
TOTAL
ASSETS
|
$
|
1,160,900
|
$
|
2,633,500
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable (including $7,000 and $6,800 to related parties in 2009 and 2008
respectively)
|
$
|
1,285,600
|
$
|
335,700
|
||||
Accrued
liabilities
|
261,400
|
207,500
|
||||||
Deferred
compensation (including $81,200 and $107,000 to related parties in
2009 and 2008 respectively)
|
220,100
|
264,900
|
||||||
Accrued
patient costs
|
305,500
|
397,500
|
||||||
Accrued
consulting fees (including $18,000 and $0 to related parties in 2009 and
2008, respectively)
|
72,100
|
67,600
|
||||||
Accrued
interest
|
-
|
42,600
|
||||||
Convertible
promissory notes
|
-
|
50,000
|
||||||
Current
portion of long-term debt
|
95,900
|
88,500
|
||||||
Total
current liabilities
|
2,240,600
|
1,454,300
|
||||||
LONG-TERM
LIABILITIES
|
||||||||
Note
payable to officer
|
24,800
|
118,600
|
||||||
Capital
lease
|
5,600
|
7,700
|
||||||
Total
long-term liabilities
|
30,400
|
126,300
|
||||||
TOTAL
LIABILITIES
|
2,271,000
|
1,580,600
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Common
stock, $0.001 par value; authorized 750,000,000 shares; 41,781,129
and 25,299,547 shares outstanding as of September 30, 2009 and
2008
|
41,800
|
25,300
|
||||||
Additional
paid-in capital
|
24,044,000
|
17,701,300
|
||||||
Accumulated
deficit
|
(25,195,900
|
)
|
(16,673,700
|
)
|
||||
Total
stockholders' equity
|
(1,110,100
|
)
|
1,052,900
|
|||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
1,160,900
|
$
|
2,633,500
|
See
accompanying Notes to Consolidated Financial Statements
F-2
CNS
RESPONSE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
YEARS ENDED
SEPTEMBER 30,
|
||||||||
2009
|
2008
|
|||||||
REVENUES
|
||||||||
Laboratory
Information Services
|
120,400
|
178,500
|
||||||
Clinical
Services
|
579,700
|
595,000
|
||||||
$
|
700,100
|
$
|
773,500
|
|||||
OPERATING
EXPENSES:
|
||||||||
Cost
of Laboratory Service revenues
|
131,600
|
163,200
|
||||||
Research
and development
|
2,137,200
|
2,097,300
|
||||||
Sales
and marketing
|
915,800
|
881,400
|
||||||
General
and administrative
|
3,887,400
|
3,105,700
|
||||||
Goodwill
impairment charges
|
320,200
|
-
|
||||||
Total
operating expenses
|
7,392,200
|
6,247,600
|
||||||
OPERATING
LOSS
|
(6,692,100
|
)
|
(5,474,100
|
)
|
||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income (expense), net
|
(1,732,900
|
)
|
104,000
|
|||||
Financing
premium
|
(90,000
|
)
|
-
|
|||||
Total
other income (expense)
|
(1,822,900
|
)
|
104,000
|
|||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(8,515,000
|
)
|
(5,370,100
|
)
|
||||
PROVISION
FOR INCOME TAXES
|
7,200
|
1,400
|
||||||
NET
LOSS
|
$
|
(8,522,200
|
)
|
$
|
(5,371,500
|
)
|
||
BASIC
NET LOSS PER SHARE
|
$
|
(0.31
|
)
|
$
|
(0.21
|
)
|
||
DILUTED
NET LOSS PER SHARE
|
$
|
(0.31
|
)
|
$
|
(0.21
|
)
|
||
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
||||||||
Basic
|
27,778,171
|
25,299,547
|
||||||
Diluted
|
27,778,171
|
25,299,547
|
See
accompanying Notes to Consolidated Financial Statements
F-3
CNS
RESPONSE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
Additional
|
||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at October 1, 2007
|
25,299,547
|
$
|
25,300
|
$
|
16,630,000
|
$
|
(11,302,200
|
)
|
$
|
5,353,100
|
||||||||||
Stock-
based compensation
|
-
|
-
|
1,071,300
|
-
|
1,071,300
|
|||||||||||||||
Net
loss for the year ended September 30, 2008
|
-
|
-
|
-
|
(5,371,500
|
)
|
(5,371,500
|
)
|
|||||||||||||
Balance
at September 30, 2008
|
25,299,547
|
$
|
25,300
|
$
|
17,701,300
|
$
|
(16,673,700
|
)
|
$
|
1,052,900
|
||||||||||
Stock-
based compensation
|
-
|
-
|
850,500
|
-
|
850,500
|
|||||||||||||||
Issuance
of 3,433,333 bridge warrants
|
-
|
-
|
1,058,000
|
-
|
1,058,000
|
|||||||||||||||
Exercise
of 1,498,986 $0.01 warrants
|
1,498,986
|
1,500
|
13,500
|
-
|
15,000
|
|||||||||||||||
Exercise
of 2,124,740 $0.132 options
|
2,124,740
|
2,100
|
278,400
|
-
|
280,500
|
|||||||||||||||
Issuance
of stock in connection with the Maxim PIPE net of offering costs of
$250,700
|
6,810,002
|
6,800
|
1,785,500
|
-
|
1,792,300
|
|||||||||||||||
Value
of beneficial conversion feature of bridge notes
|
-
|
-
|
642,000
|
-
|
642,000
|
|||||||||||||||
Issuance
of stock on conversion $1,720,900 of bridge notes and accrued
interest
|
6,047,854
|
6,100
|
1,714,800
|
-
|
1,720,900
|
|||||||||||||||
Warrants
issued in association with the Maxim PIPE
|
-
|
-
|
1,607,000
|
-
|
1,607,000
|
|||||||||||||||
Offering
cost pertaining to the Maxim PIPE
|
-
|
-
|
(1,607,000
|
)
|
-
|
(1,607,000
|
)
|
|||||||||||||
Net
loss for the year ended September 30, 2009
|
-
|
-
|
(8,522,200
|
)
|
(8,522,200
|
)
|
||||||||||||||
Balance
at September 30, 2009
|
41,781,129
|
$
|
41,800
|
$
|
24,044,000
|
$
|
(25,195,900
|
)
|
$
|
(1,110,100
|
)
|
See
accompanying Notes to Consolidated Financial Statements
F-4
CNS
RESPONSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
YEAR ENDED SEPTEMBER 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(8,522,200
|
)
|
$
|
(5,371,500
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
& amortization
|
9,100
|
6,300
|
||||||
Discount
on bridge notes issued
|
1,058,000
|
-
|
||||||
Value
of beneficial conversion feature of bridge notes
|
642,000
|
-
|
||||||
Stock
based compensation
|
850,500
|
1,071,300
|
||||||
Non-cash
interest expense
|
20,900
|
-
|
||||||
Goodwill
impairment
|
320,200
|
-
|
||||||
Write-off
of doubtful accounts
|
22,700
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
13,800
|
(39,000
|
)
|
|||||
Prepaids
and other
|
99,900
|
(30,400
|
)
|
|||||
Accounts
payable and accrued liabilities
|
1,003,800
|
116,300
|
||||||
Deferred
compensation and others
|
(40,300
|
)
|
192,600
|
|||||
Accrued
patient costs
|
(92,000
|
)
|
397,500
|
|||||
Net
cash used in operating activities
|
(4,613,600
|
)
|
(3,656,900
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Deferred
offering relating to acquisition
|
-
|
(43,700
|
)
|
|||||
Furniture
& Fixtures
|
(2,000
|
)
|
(30,900
|
)
|
||||
Net
cash used in investing activities
|
(2,000
|
)
|
(74,600
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of convertible debt with accrued interest
|
(92,600
|
)
|
-
|
|||||
Repayment
of debt
|
(86,700
|
)
|
(60,600
|
)
|
||||
Repayment
of lease payable
|
(1,800
|
)
|
(1,000
|
)
|
||||
Proceeds
from the sale of common stock, net of offering costs
|
1,792,300
|
-
|
||||||
Proceeds
from bridge notes
|
1,700,000
|
-
|
||||||
Proceeds
from exercise of warrants and options
|
295,500
|
-
|
||||||
Net
cash provided (used) by financing activities
|
3,606,700
|
(61,600
|
)
|
|||||
NET
INCREASE (DECREASE) IN CASH
|
(1,008,900
|
)
|
(3,793,100
|
)
|
||||
CASH-
BEGINNING OF YEAR
|
1,997,000
|
5,790,100
|
||||||
CASH-
END OF YEAR
|
$
|
988,100
|
$
|
1,997,000
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash paid
during the period for:
|
||||||||
Interest
|
$
|
64,100
|
$
|
22,440
|
||||
Income
taxes
|
$
|
7,200
|
$
|
5,972
|
||||
Fair
value of note payable to officer issued for acquisition
|
$
|
118,600
|
$
|
265,900
|
||||
Fair
value of equipment acquired through lease
|
$
|
7,600
|
$
|
10,500
|
||||
Conversion
of bridge notes and related accrued interest into common
stock
|
$
|
1,720,900
|
$
|
-
|
See
accompanying Notes to Consolidated Financial Statements
F-5
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
1.
|
NATURE OF
OPERATIONS
|
Organization
and Nature of Operations
CNS
Response, Inc. (the “Company”) was incorporated in Delaware on July 10, 1984.
The Company utilizes a patented system that guides psychiatrists and other
physicians to determine a proper treatment for patients with mental, behavioral
and/or addictive disorders. The Company also intends to identify,
develop and commercialize new indications of approved drugs and drug candidates
for this patient population.
In
addition, as a result of its acquisition of Neuro-Therapy Clinic, Inc. (“NTC”)
on January 15, 2008, the Company provides behavioral health care
services. NTC is a center for highly-advanced testing and treatment
of neuropsychiatric problems, including learning, attentional and behavioral
challenges, mild head injuries, as well as depression, anxiety, bipolar and all
other common psychiatric disorders. Through this acquisition, the Company
expects to advance neurophysiology data collection, beta-test planned
technological advances in rEEG, advance physician training in rEEG and
investigate practice development strategies associated with rEEG.
Going
Concern Uncertainty
The
Company has a limited operating history and its operations are subject to
certain problems, expenses, difficulties, delays, complications, risks and
uncertainties frequently encountered in the operation of a new business. These
risks include the failure to develop or supply technology or services to meet
the demands of the marketplace, the ability to obtain adequate financing on a
timely basis, the failure to attract and retain qualified personnel, competition
within the industry, government regulation and the general strength of regional
and national economies.
To date,
the Company has financed its cash requirements primarily from debt and equity
financings. It will be necessary for the Company to raise additional
funds. The Company’s liquidity and capital requirements depend on
several factors, including the rate of market acceptance of its services, the
future profitability of the Company, the rate of growth of the Company’s
business and other factors described elsewhere in this Annual
Report. The Company is currently exploring additional sources of
capital but there can be no assurances that any financing arrangement will be
available in amounts and terms acceptable to the Company.
2.
|
CONVERTIBLE DEBT AND EQUITY
FINANCINGS
|
Prior to
September 30, 2006, CNS California issued convertible promissory notes with
detachable warrants from time to time to fund its operations. The
notes bear interest at 8% per year, compounded annually, and are payable on
demand. The terms of the notes provide for the (i) conversion of
principal and accrued interest into the same type of securities issued by CNS
California upon a qualified institutional financing, the amount of which
financing varies between notes and ranges from $1 to $4 million, and (ii)
conversion price to be equal to the same price as the shares sold in the
financing. The notes provide for an aggregate of $2,196,000 in
principal to convert automatically and $920,700 to convert at the note holders’
options based upon certain financing requirements (as defined).
In
October 2006, CNS California and the note holders of certain convertible
promissory notes converted notes with an aggregate outstanding balance of
$3,061,700 and related accrued and unpaid interest of $1,005,300 at September
30, 2006 into 5,993,515 shares of CNS California Series A Preferred
Stock. In addition, the exercise price of warrants to purchase
1,062,116 shares of the CNS California common stock issued to such note holders
was changed to $0.59 per share. Upon completion of the reverse merger
pursuant to which CNS California became a subsidiary of the Company, the
preferred shares were converted into 5,993,515 shares of the Company’s
common stock and the warrants were converted into warrants to purchase 1,062,116
shares of the Company’s common stock at an exercise price of $0.59 per
share. The consolidated financial statements of the Company presented
reflect the issuance of these shares as common stock.
F-6
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
As of
September 30, 2008, one note issued by CNS California with a principal
balance of $49,950 was outstanding. In May 2009, the Company entered into a
settlement and release agreement with this note holder and fully repaid the
promissory note with accrued interest on June 30, 2009.
Between
March 30 and June 12, 2009 the Company entered into three rounds of bridge
financings in the form of secured convertible promissory notes. These
three rounds are referred to as:
|
(a)
|
the March 30, 2009 SAIL/Brandt
Notes
|
|
(b)
|
the May 14, 2009 SAIL
Note
|
|
(c)
|
the June 12, 2009 Pappajohn
Note
|
All these
notes were converted to equity as a result of the private placement transaction
that closed on August 26, 2009 and are fully described in the section
below.
The
Private Placement Transaction
On
August 26, 2009, CNS Response, Inc. (the “Company”) received gross proceeds of
approximately $2,043,000 in a private placement transaction (the “Private
Placement”) with six investors. Pursuant to Subscription Agreements
entered into with the investors, the Company sold approximately 38 Investment
Units at $54,000 per Investment Unit. Each “Investment Unit” consists
of 180,000 shares of the Company’s common stock and a five year non-callable
warrant to purchase 90,000 shares of the Company’s common stock at an exercise
price of $0.30 per share. After commissions and expenses, the Company
received net proceeds of approximately $1,792,300 in the Private
Placement. These funds were used to repay outstanding liabilities,
fund the Company’s recent clinical trial and for general working capital
purposes.
A
FINRA member firm, the Maxim Group LLC (“Maxim Group”), acted as lead placement
agent in connection with the Private Placement. For its services in
connection with the first closing of the offering, Maxim Group received (i) a
cash fee of $ 55,980, (ii) a cash expense allowance of $40,860, and (iii) a five
year non-callable warrant to purchase 274,867 shares of the Company’s common
stock at an exercise price of $0.33 per share, first exercisable no earlier than
February 26, 2010.
Pursuant
to a Registration Rights agreement entered into with each investor, the Company
agreed to file a registration statement covering the resale of the common stock
and the common stock underlying the warrants sold in the Private Placement, as
well as the common stock underlying the warrants issued to Maxim Group by the
later of October 26, 2009 or the 20th calendar day after the termination of the
offering. The Registration Rights agreement was subsequently amended
to permit the filing of the registration statement no later that 10
business days following the Company’s filing of its Annual Report on Form 10-K
for its September 30, 2009 year end, or the 20 th
calendar day after termination of the private offering.
In
addition, the Company agreed to use its best efforts to have the registration
statement declared effective no later than 180 days following the final closing
of the offering and maintain such effectiveness until the earlier of the second
anniversary of the date of such effectiveness or the date that all of the
securities covered by the registration statement may be sold without
restriction.
F-7
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Events
Relating to Private Placement Transaction
|
(a)
|
Conversion of the March 30, 2009
SAIL/Brandt Notes
|
On March
30, 2009, the Company entered into two Senior Secured Convertible Promissory
Notes, each in the principal amount of $250,000 (each a “March Note” and,
collectively, the “March Notes”), with Brandt Ventures, GP (“Brandt”) and SAIL
Venture Partners, LP (“SAIL”). Leonard Brandt, a former member of the Company’s
board of directors, is the general partner of Brandt and David B. Jones, a
current member of the Company’s board of directors, is a managing member of Sail
Venture Partners, LLC, which is the general partner of SAIL. The terms of the
March Notes provided that in the event the Company consummates an equity
financing transaction of at least $1,500,000 (excluding any and all other debt
that is converted), then the principal and all accrued, but unpaid interest
outstanding under the notes shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 90% of the per share
price paid by the investors in such financing. In accordance with the
terms of the March Notes, at the closing of the Private Placement, the Company
issued to each of Brandt and SAIL 956,164 shares of common stock and a five year
non-callable warrant to purchase 478,082 shares of its common stock at an
exercise price of $0.30 per share.
|
(b)
|
Conversion of the May 14, 2009
SAIL Note
|
On
May 14, 2009, the Company entered into a Bridge Note and Warrant Purchase
Agreement (the “SAIL Purchase Agreement”) with SAIL. Pursuant to the SAIL
Purchase Agreement, on May 14, 2009 SAIL purchased a Secured Promissory Note in
the principal amount of $200,000 from the Company (the “May SAIL
Note”). In order to induce SAIL to purchase the note, the Company
issued to SAIL a warrant to purchase up to 100,000 shares of the Company’s
common stock at a purchase price equal to $0.25 per share. The
warrant expires on May 31, 2016.
The terms
of the May SAIL Note provided that in the event the Company consummates an
equity financing transaction of at least $1,500,000 (excluding any and all other
debt that is converted), then the principal and all accrued, but unpaid interest
outstanding under the note shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 85% of the per share
price paid by the investors in such financing. In accordance with the
terms of the May SAIL Note, at the first closing of the Private Placement on
August 26, 2009, the Company issued to SAIL 802,192 shares of its common stock
and a five year non-callable warrant to purchase 401,096 shares of its common
stock at an exercise price of $0.30 per share.
|
(c)
|
Conversion of the June 12,
2009 Pappajohn Note
|
On June
12, 2009, John Pappajohn entered into a Bridge Note and Warrant Purchase
Agreement (the “Pappajohn Purchase Agreement”) with the
Company. Pursuant to the Pappajohn Purchase Agreement, Mr. Pappajohn
purchased a Secured Convertible Promissory Note in the principal amount of
$1,000,000 from the Company. In order to induce Mr. Pappajohn to
purchase the note, the Company issued to Mr. Pappajohn a warrant to
purchase up to 3,333,333 shares of the Company’s common stock at a purchase
price equal to $0.30 per share. The warrant expires on June 30,
2016.
The note
issued pursuant to the Pappajohn Purchase Agreement provided that the principal
amount of $1,000,000 together with a single payment of $90,000 (the “Premium
Payment”) would be due and payable, unless sooner converted into shares of the
Company’s common stock (as described below), upon the earlier to occur of: (i) a
declaration by Mr. Pappajohn on or after June 30, 2010 or (ii) an Event of
Default (as defined in the note). The note was secured by a lien on
substantially all of the assets (including all intellectual property) of the
Company. In the event of a liquidation, dissolution or winding
up of the Company, unless Mr. Pappajohn informed the Company otherwise, the
Company was required to pay Mr. Pappajohn an amount equal to the product of 250%
multiplied by the then outstanding principal amount of the note and the Premium
Payment.
The
Pappajohn Purchase Agreement also provided that in the event the Company
consummated an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), the then outstanding principal amount
of the note (but excluding the Premium Payment, which would be repaid in cash at
the time of such equity financing) would be automatically converted into the
securities issued in the equity financing by dividing such amount by the per
share price paid by the investors in such financing. The note also
provided that the securities issued upon conversion of the note would be
otherwise issued on the same terms as such shares are issued to the lead
investor that purchases shares of the Company in the qualified
financing.
On August
26, 2009, at the closing of the Private Placement, the Company paid the Premium
Payment to Mr. Pappajohn, and the outstanding principal amount of Mr.
Pappajohn’s note ($1,000,000 as of August 26, 2009) converted into 3,333,334
shares of the Company’s common stock. In addition, in accordance with the terms
of his note, Mr. Pappajohn was issued a five year non-callable warrant to
purchase 1,666,667 shares of the Company’s common stock at an exercise price of
$0.30 per share.
F-8
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Upon the
abovementioned conversions, the Company evaluated the terms and calculated the
fair value of the common stocks (by using the close market price at the
respective original issuance date of the convertible notes) and warrants (by
running the Black-Scholes Model) issued upon the conversions and so determined
that the notes were converted with a beneficial conversion feature amounting to
$642,000. As a result, for the year ended September 30, 2009, the Company
recorded $642,000 as interest expense.
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis
of Consolidation
The
consolidated financial statements include the accounts of CNS Response, Inc., an
inactive parent company, and its wholly owned subsidiaries CNS California and
NTC. All significant intercompany transactions have been eliminated
in consolidation.
The
preparation of the consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expense, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including
those related to revenue recognition, doubtful accounts, intangible assets,
income taxes, valuation of equity instruments, contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates.
Cash
The
Company deposits its cash with major financial institutions and may at times
exceed federally insured limit of $250,000. At September 30, 2009
cash exceeded the federally insured limit by $819,600. The Company believes that
the risk of loss is minimal. To date, the Company has not experienced any losses
related to cash deposits with financial institutions.
Fair
Value of Financial Instruments
ASC
825-10 (formerly SFAS 107, “Disclosures about Fair Value of Financial
Instruments”) defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable and accrued liabilities, to approximate their fair values because of the
short period of time between the origination of such instruments and their
expected realization.
The
Company also analyzes all financial instruments with features of both
liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”), ASC 815-10 (formerly SFAS No 133, “Accounting for Derivative
Instruments and Hedging Activities”) and ASC 815-40 (formerly EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”).
The
Company adopted ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) on
January 1, 2008. ASC 820-10 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as
follow:
|
·
|
Level 1 inputs
to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active
markets.
|
|
·
|
Level 2 inputs
to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the
full term of the financial
instruments.
|
F-9
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
|
·
|
Level 3 inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
As of
September 30, 2009 the Company did not identify any assets or liabilities that
are required to be presented on the balance sheet at fair value in accordance
with ASC 820-10.
Accounts
Receivable
The
Company estimates the collectability of customer receivables on an ongoing basis
by reviewing past-due invoices and assessing the current creditworthiness of
each customer. Allowances are provided for specific receivables
deemed to be at risk for collection.
Fixed
Assets
Fixed
assets, which are recorded at cost, consist of office furniture and equipment
and are depreciated over their estimated useful life on a straight-line
basis. The useful life of these assets is estimated to be from 3 to 5
years. Depreciation and accumulated depreciation for the years ended
September 2009 and 2008 is $9,100 and $6,300 respectively.
Goodwill
In
accordance with ASC 350-20 (formerly Statement of Financial Accounting Standards
(“SFAS” ) No. 142, Goodwill
and Other Intangible Assets ) (“ASC 350-10”) , goodwill is not amortized
but instead is measured for impairment at least annually, or more
frequently if certain indicators are present.
The
Company measures for impairment by applying fair value-based tests at the
reporting unit level. If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, then goodwill is not
impaired and no further testing is performed. The Company, if necessary,
measures the amount of impairment by applying fair value-based tests to
individual assets and liabilities within each reporting unit. If the carrying
value of a reporting unit’s goodwill exceeds its implied fair value, the Company
records an impairment loss equal to the difference.
To
determine the reporting unit’s fair values, the Company uses the income
approach. The income approach provides an estimate of fair value based on
discounted expected future cash flows (“DCF”). Estimates and assumptions with
respect to the determination of the fair value of the Company’s reporting units
using the income approach include the Company’s operating forecasts, revenue
growth rates and risk-commensurate discount rates.
The
Company’s estimates of revenues and costs are based on historical data, various
internal estimates and a variety of external sources, and are developed by the
Company’s regular long-range planning process.
During
the fourth quarter of fiscal year 2009, the Company conducted a goodwill
impairment test and determined that the amount of the recorded goodwill related
to the NTC acquisition was fully impaired. Accordingly, the Company
recorded a goodwill impairment charge of $320,200 for the year ended September
30, 2009.
Long-Lived
Assets
As
required by ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ) (“ASC 350-30”), the Company reviews the
carrying value of its long-lived assets whenever events or changes in
circumstances indicate that the historical cost-carrying value of an asset may
no longer be appropriate. The Company assesses recoverability of the carrying
value of the asset by estimating the future net cash flows expected to result
from the asset, including eventual disposition. If the future net cash flows are
less than the carrying value of the asset, an impairment loss is recorded equal
to the difference between the asset’s carrying value and fair value. No
impairment loss, apart from the abovementioned goodwill impairment, was recorded
for the years ended September 30, 2009 and 2008.
F-10
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Revenues
The
Company recognizes revenue as the related services are delivered.
Research
and Development Expenses
The
Company charges all research and development expenses to operations as
incurred.
Advertising
Expenses
The
Company charges all advertising expenses to operations as incurred.
Stock-Based
Compensation
The
Company has adopted ASC 718-20 (formerly SFAS No. 123R, Share-Based Payment -revised
2004) (“ASC718-20”) and related interpretations which establish the accounting
for equity instruments exchanged for employee services. Under ASC 718-20,
share-based compensation cost is measured at the grant date based on the
calculated fair value of the award. The expense is recognized over the
employees’ requisite service period, generally the vesting period of the
award.
Income
Taxes
The
Company accounts for income taxes to conform to the requirements of ASC 740-20
(formerly SFAS No. 109, Accounting for Income Taxes )
(“ASC 740-20”). Under the provisions of ASC_740-20, an entity recognizes
deferred tax assets and liabilities for future tax consequences of events that
have already been recognized in the Company's financial statements or tax
returns. The measurement of deferred tax assets and liabilities is based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be
realized.
Comprehensive
Income (Loss)
ASC
220-10 (formerly, SFAS No. 130, Reporting Comprehensive
Income ) (“ASC 220-10”), requires disclosure of all components of
comprehensive income (loss) on an annual and interim
basis. Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company’s comprehensive
income (loss) is the same as its reported net income (loss) for the years ended
September 30, 2009 and 2008.
Income
(Loss) per Share
Basic and
diluted net income (loss) per share has been computed using the weighted average
number of shares of common stock outstanding during the period.
Segment
Information
The
Company uses the management approach for determining which, if any, of its
products and services, locations, customers or management structures constitute
a reportable business segment. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of any reportable segments. Management uses
two measurements of profitability and does disaggregate its business for
internal reporting and therefore operates two business segments which are
comprised of a reference laboratory and a clinic. The Reference
Laboratory provides reports (“rEEG Reports”) that assist physicians with
treatment strategies for patients with behavioral (psychiatric and/or addictive)
disorders based on the patient’s own physiology. The Clinic operates
NTC, a full service psychiatric practice.
F-11
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Reclassifications
Certain
amounts in prior years have been reclassified to conform to current year
presentation. These reclassifications had no effect on previously
reported operating loss or net income.
Recent
Accounting Pronouncements
In April
2009, the FASB issued ASC 825-10 (formerly FASB Staff Position
No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments) (“ASC 825”) , which requires that the fair value
disclosures required for all financial instruments within the scope of SFAS 107,
"Disclosures about Fair Value of Financial Instruments", be included in interim
financial statements. This FSP also requires entities to disclose the method and
significant assumptions used to estimate the fair value of financial instruments
on an interim and annual basis and to highlight any changes from prior periods.
FSP 107-1 was effective for interim periods ending after June 15, 2009, with
early adoption permitted. The adoption of FSP 107-1 did not have a material
impact on the Company’s consolidated financial statements.
In May
2009, the FASB issued ASC 855-10 (formerly Statement No. 165, Subsequent
Events) (“ASC 855”). ASC 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In accordance
with this Statement, entities should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The adoption of this
statement did not have a material impact on the Company’s consolidated
financial statements.
In June
2009, the FASB approved its Accounting Standards Codification, or Codification,
as the single source of authoritative United States accounting and reporting
standards applicable for all non-governmental entities, with the exception of
the SEC and its staff. The Codification, which changes the referencing of
financial standards, is effective for interim or annual financial periods ending
after September 15, 2009. Therefore, starting from fiscal year end 2009,
all references made to US GAAP will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it did not have any impact on the Company’s consolidated
financial statements.
As a
result of the Company’s implementation of the Codification during the year ended
September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current annual financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impact of recently adopted accounting literature, particularly
for guidance adopted since the beginning of the current fiscal year but prior to
the Codification.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall,” and provides clarification for the fair value
measurement of liabilities. ASU 2009-05 is effective for the first reporting
period including interim period beginning after issuance. The Company does not
expect the adoption of ASU 2009-05 to have a material impact on its consolidated
financial statements.
4.
|
STOCKHOLDERS’
EQUITY
|
Common
and Preferred Stock
As of
September 30, 2009 the Company is authorized to issue 750,000,000 shares of
common stock.
As of
September 30, 2009, CNS California is authorized to issue 100,000,000 shares of
two classes of stock, 80,000,000 of which was designated as common shares and
20,000,000 of which was designated as preferred shares.
As of
September 30, 2009, Colorado CNS Response, Inc. is authorized to issue 1,000,000
shares of common stock.
F-12
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
As of
September 30, 2009, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of
Colorado CNS Response, Inc., is authorized to issue ten thousand (10,000) shares
of common stock, no par value per share.
Stock-Option
Plan
On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form
of restricted shares, stock options (which may constitute incentive stock
options(ISO) or non-statutory stock options (NSO)), stock appreciation rights
and stock unit grants to eligible employees, directors and consultants and is
administered by the board of directors. A total of 10 million shares of stock
are reserved for issuance under the 2006 Plan. As of September 30,
2009, 2,124,740 options were exercised and there were 6,662,014 options and
183,937 restricted shares outstanding under the 2006 Plan and 1,029,309 shares
available for issuance of awards.
The 2006
Plan provides that in any calendar year, no eligible employee or director shall
be granted an award to purchase more than 3 million shares of stock. The option
price for each share of stock subject to an option shall be (i) no less than the
fair market value of a share of stock on the date the option is granted, if the
option is an ISO, or (ii) no less than 85% of the fair market value of the stock
on the date the option is granted, if the option is a NSO; provided, however, if
the option is an ISO granted to an eligible employee who is a 10% shareholder,
the option price for each share of stock subject to such ISO shall be no less
than 110% of the fair market value of a share of stock on the date such ISO is
granted. Stock options have a maximum term of ten years from the date of grant,
except for ISOs granted to an eligible employee who is a 10% shareholder, in
which case the maximum term is five years from the date of grant. ISOs may be
granted only to eligible employees. The Company has adopted ASC 718-20
(formerly, SFAS No. 123R -revised 2004, “Share-Based Payment”), and related
interpretations. Under ASC 718-20, share-based compensation cost is measured at
the grant date based on the calculated fair value of the award. The Company
estimates the fair value of each option on the grant date using the
Black-Scholes model. The following assumptions were made in
estimating the fair value:
Options granted in:
|
Dividend
Yield
|
Risk-free
interest rate
|
Expected
volatility
|
Expected life
|
|||||||||
Fiscal
2006
|
0
|
%
|
5.46
|
%
|
100
|
%
|
5
years
|
||||||
November
2006
|
0
|
%
|
5.00
|
%
|
100
|
%
|
10
years
|
||||||
August
2007
|
0
|
%
|
4.72
|
%
|
91
|
%
|
5
years
|
||||||
October
2007
|
0
|
%
|
4.60
|
%
|
105
|
%
|
5
years
|
||||||
December
2007
|
0
|
%
|
4.00
|
%
|
113
|
%
|
5
years
|
||||||
April
2008
|
0
|
%
|
3.78
|
%
|
172
|
%
|
5
years
|
||||||
September
2008
|
0
|
%
|
3.41
|
%
|
211
|
%
|
5
years
|
||||||
October
2008
|
0
|
%
|
3.77
|
%
|
211
|
%
|
5
years
|
||||||
March
2009
|
0
|
%
|
3.00
|
%
|
385
|
%
|
5
years
|
The
expense is recognized over the employees’ requisite service period, generally
the vesting period of the award. Stock-based compensation expense
included in the accompanying statements of operations for the years ended
September 30, 2009 and 2008 is as follows:
For the fiscal year ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Operations
|
$
|
16,100
|
$
|
16,100
|
||||
Research
and development
|
260,800
|
321,100
|
||||||
Sales
and marketing
|
137,500
|
83,100
|
||||||
General
and administrative
|
436,100
|
651,000
|
||||||
Total
|
$
|
850,500
|
$
|
1,071,300
|
F-13
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Total
unrecognized compensation as of September 30, 2009 amounted to
$1,094,100.
A summary
of stock option activity is as follows:
Number of
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Outstanding
at September 30, 2007
|
7,436,703
|
$
|
0.57
|
|||||
Granted
|
1,880,621
|
$
|
0.85
|
|||||
Exercised
|
-
|
-
|
||||||
Forfeited
|
(352,757
|
)
|
$
|
1.09
|
||||
Outstanding
at September 30, 2008
|
8,964,567
|
$
|
0.60
|
|||||
Granted
|
80,000
|
$
|
0.43
|
|||||
Exercised
|
(2,124,740
|
)
|
$
|
0.132
|
||||
Forfeited
|
(257,813
|
)
|
$
|
0.51
|
||||
Outstanding
at September 30, 2009
|
6,662,014
|
$
|
0.76
|
|||||
Weighted
average fair value of options granted during:
|
||||||||
Year
ended September 30, 2008
|
$
|
0.73
|
||||||
Year
ended September 30, 2009
|
$
|
0.43
|
Following
is a summary of the status of options outstanding at September 30,
2009:
Exercise Price
|
Number of Shares
|
Weighted Average
Contractual Life
|
Weighted
Average
Exercise Price
|
|||||||
$ |
0.12
|
859,270
|
10
years
|
$
|
0.12
|
|||||
$ |
0.132
|
987,805
|
7
years
|
$
|
0.132
|
|||||
$ |
0.30
|
135,700
|
10
years
|
$
|
0.30
|
|||||
$ |
0.59
|
28,588
|
10
years
|
$
|
0.59
|
|||||
$ |
0.80
|
140,000
|
10
years
|
$
|
0.80
|
|||||
$ |
0.89
|
968,875
|
10
years
|
$
|
0.89
|
|||||
$ |
0.96
|
|
496,746
|
10
years
|
$
|
0.96
|
||||
$ |
1.09
|
2,614,232
|
10
years
|
$
|
1.09
|
|||||
$ |
1.20
|
333,611
|
5
years
|
$
|
1.20
|
|||||
$ |
0.51
|
275,000
|
10
years
|
$
|
0.51
|
|||||
$ |
0.40
|
56,000
|
10
years
|
$
|
0.40
|
|||||
Total
|
6,662,014
|
$
|
0.76
|
Warrants
to Purchase Common Stock
At
September 30, 2007, there were warrants outstanding to purchase 6,899,353 shares
of the Company’s common stock at exercise prices ranging from $0.01 to $1.812
with a weighted average exercise price of $1.04. The warrants expire
at various times through 2017. No warrants were issued or exercised
during the 12 months ended September 30, 2008.
During
the year ended September 30, 2009, 1,498,986 warrants with an exercise price of
$0.01 were exercised.
F-14
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
During
the year ended September 30, 2009, the following additional 10,137,118 warrants
were granted and are outstanding as of September 30, 2009:
Warrants to
Purchase
|
Exercise
Price
|
Issued
in Connection With:
|
|||
100,000
shares
|
$
|
0.25
|
A
$200,000 bridge note with SAIL on May 14, 2009 as described in Note
2
|
||
3,333,333
shares
|
$
|
0.30
|
A
$1,000,000 bridge note with Pappajohn on June 12, 2009 as described
in Note 2
|
||
3,404,991
shares
|
$
|
0.30
|
Associated
with the private placement transaction of 6,810,002 shares at $0.30 with
50% warrant coverage as described in Note 2
|
||
956,164
shares
|
$
|
0.27
|
Associated
with the automatic conversion of
|
||
401,096
shares
|
$
|
0.255
|
$1,700,000
of convertible promissory notes and
|
||
1,666,667
shares
|
$
|
0.30
|
$20,900
accrued interest upon completion an equity
|
||
financing
in excess of $1,500,000 as described in Note
2
|
|||||
274,867
shares
|
$
|
0.33
|
The
placement agent for private placement as described in Note
2
|
At
September 30, 2009, there were warrants outstanding to purchase 15,537,485
shares of the Company’s common stock at exercise prices ranging from $0.01 to
$1.812 with a weighted average exercise price of $0.65. The warrants
expire at various times through 2017.
5.
|
INCOME
TAXES
|
The
Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. We provide a valuation allowance to reduce our deferred tax
assets to their estimated realizable value.
Reconciliations
of the provision (benefit) for income taxes to the amount compiled by applying
the statutory federal income tax rate to profit (loss) before income taxes is as
follows for each of the years ended September 30:
2009
|
2008
|
|||||||
Federal
income tax (benefit) at statutory rates
|
(34
|
)%
|
(34
|
)%
|
||||
Stock-based
compensation
|
0
|
%
|
20
|
%
|
||||
Non
deductible interest expense
|
0
|
%
|
0
|
%
|
||||
Change
in valuation allowance
|
37
|
%
|
14
|
%
|
||||
Goodwill
write off
|
(3
|
)%
|
0
|
%
|
F-15
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities that give rise to significant portions of deferred taxes
relate to the following at September 30, 2009 and 2008:
2009
|
2008
|
|||||||
Deferred
income tax assets:
|
||||||||
Net
operating loss carryforward
|
$
|
8,765,900
|
$
|
4,953,000
|
||||
Deferred
interest, consulting and compensation liabilities
|
987,500
|
17,000
|
||||||
Amortization
|
(24,300
|
)
|
223,300
|
|||||
Deferred
income tax assets - other
|
7,800
|
-
|
||||||
9,736,900
|
5,193,300
|
|||||||
Deferred
income tax liabilities—other
|
-
|
(12 ,300
|
)
|
|||||
Deferred
income tax asset—net before valuation allowance
|
9,736,900
|
5,181,000
|
||||||
Valuation
allowance
|
(9,736,900
|
)
|
(5,181,000
|
)
|
||||
Deferred
income tax asset—net
|
$
|
-
|
$
|
-
|
Current
and non-current deferred taxes have been recorded on a net basis in the
accompanying balance sheet. As of September 30, 2009, the Company has net
operating loss carryforwards of approximately $20.8 million. The net operating
loss carryforwards expire by 2028. Utilization of net operating losses and
capital loss carryforwards may be subject to the limitations imposed by Section
382 of the Internal Revenue Code. The Company has placed a valuation allowance
against the deferred tax assets in excess of deferred tax liabilities due to
the uncertainty surrounding the realization of such excess tax assets.
Management periodically evaluates the recoverability of the deferred tax assets
and the level of the valuation allowance. At such time as it is determined that
it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced accordingly.
6 . ACQUISITION OF NEURO THERAPY CLINIC,
PC
On
January 15, 2008, the Company, through its wholly owned subsidiary, Colorado CNS
Response, Inc., acquired all of the outstanding common stock of Neuro-Therapy
Clinic, PC (“NTC”) in exchange for a non-interest bearing note payable of
$300,000 payable in equal monthly installments over 36 months. Upon
the completion of the acquisition, the sole shareholder of NTC was appointed
Chief Medical Officer of the Company. Prior to the acquisition, NTC
was the Company’s largest customer.
The
acquisition was accounted under the purchase method of accounting, and
accordingly, the purchase price was allocated to NTC’s net tangible assets based
on their estimated fair values as of January 15, 2008. The excess purchase price
over the value of the net tangible assets was recorded as
goodwill. The purchase price and the allocation thereof are as
follows:
Fair
value of note payable issued
|
$
|
265,900
|
||
Direct
transaction costs
|
43,700
|
|||
Purchase
price
|
309,600
|
|||
Allocated
to net tangible liabilities, including cash of
$32,100
|
(10,600
|
)
|
||
Allocated
to goodwill
|
$
|
320,200
|
The
acquisition was not material, and accordingly, no pro forma results are
presented. As of September 30, 2009, goodwill was measured and
determined to be fully impaired and consequently written off.
7 . LONG-TERM DEBT
As
described in Note 6 above, during the year ended September 30, 2008 the Company
issued a note payable to an officer in connection with the acquisition of
NTC. The note is non-interest bearing and the Company determined its
fair value by imputing interest at an annual rate of 8%. As of
September 30, 2009 the note has an outstanding principal balance in the
amount of $118,600, of which $93,800 is current.
F-16
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
8 . REPORTABLE
SEGMENTS
The
Company operates in two business segments: reference laboratory and
clinic. Reference laboratory provide reports (“rEEG Reports”) that
assist physicians with treatment strategies for patients with behavioral
(psychiatric and/or addictive) disorders based on the patient’s own
physiology. Clinic operates NTC, a full service psychiatric
practice.
The
following tables show operating results for our reportable segments, along with
reconciliation from segment gross profit to (loss) from operations, the most
directly comparable measure in accordance with generally accepted accounting
principles in the United States, or GAAP:
Year ended September 30,2009
|
||||||||||||||||
Reference
Laboratory
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
138,900
|
628,200
|
(67,000
|
)
|
700,100
|
|||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
131,600
|
18,500
|
(18,500
|
)
|
131,600
|
|||||||||||
Research
and development
|
2,137,200
|
-
|
-
|
2,137,200
|
||||||||||||
Sales
and marketing
|
908,500
|
7,300
|
-
|
915,800
|
||||||||||||
General
and administrative
|
3,266,300
|
669,600
|
(48,500
|
)
|
3,887,400
|
|||||||||||
Goodwill
impairment charges
|
320,000
|
-
|
-
|
320,000
|
||||||||||||
Total
operating expenses
|
6,763,800
|
695,400
|
(67,000
|
)
|
7,392,200
|
|||||||||||
Loss
from operations
|
$
|
(6,624,900
|
)
|
$
|
(67,200
|
)
|
$
|
0
|
$
|
(6,692,100
|
)
|
The following table
includes selected segment financial information as of September 30, 2009,
related to goodwill and total assets:
Reference
Laboratory
|
Clinic
|
Total
|
||||||||||
Goodwill
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Total
assets
|
$
|
1,118,000
|
$
|
42,900
|
$
|
1,160,900
|
9.
|
EARNINGS PER
SHARE
|
In
accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per
Share”), basic net income (loss) per share is computed by dividing the net
income (loss) to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. For the years ended September 30, 2009
and 2008, the Company has excluded all common equivalent shares from the
calculation of diluted net loss per share as such securities are
anti-dilutive.
F-17
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
A summary
of the net income (loss) and shares used to compute net income (loss) per share
for the years ended September 30, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
Net
loss for computation of basic net income (loss) per share
|
$
|
(8,522,200
|
)
|
$
|
(5,371,500
|
)
|
||
Net
income (loss) for computation of dilutive net income (loss) per
share
|
$
|
(8,522,200
|
)
|
$
|
(5,371,500
|
)
|
||
Basic
net income (loss) per share
|
$
|
(0.31
|
)
|
$
|
(0.21
|
)
|
||
Diluted
net income (loss) per share
|
$
|
(0.31
|
)
|
$
|
(0.21
|
)
|
||
Basic
weighted average shares outstanding
|
27,778,171
|
25,299,547
|
||||||
Dilutive
common equivalent shares
|
-
|
-
|
||||||
Diluted
weighted average common shares
|
27,778,171
|
25,299,547
|
||||||
Anti-dilutive
common equivalent shares not included in the
computation
of dilutive net loss per share:
|
||||||||
Convertible
debt
|
-
|
4,995,000
|
||||||
Warrants
|
8,318,310
|
6,899,353
|
||||||
Options
|
8,548,206
|
8,767,212
|
10.
|
COMMITMENTS AND CONTINGENT
LIABILITIES
|
Litigation
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the ordinary course of business. Other than as set forth above, we
are not currently party to any legal proceedings, the adverse outcome of which,
in our management’s opinion, individually or in the aggregate, would have a
material adverse effect on our results of operations or financial
position.
Since
June of 2009, the Company has been involved in litigation against Leonard J.
Brandt, a stockholder, former director and the Company’s former Chief
Executive Officer (“Brandt”) in both the Delaware Chancery Court and the United
States District Court for the Central District of California. For a
full description of the events associated with the Brandt Litigation please
refer to the section called “Business” under the heading “Legal Proceedings”
contained elsewhere in this prospectus which is incorporated herein by
reference.
Lease
Commitments
The
Company’s lease for its headquarters and Laboratory Information Services
business, located at 2755 Bristol St., Suite 285, Costa Mesa, California,
expired in November 2009. The Company continues to lease this space
on a month to month basis at a cost of $4,410 per month.
The
Company leases space for its Clinical Services operations under an operating
lease. The base rental as of September 2009 is $6,021 per month. This
lease terminates on February 28, 2010.
The
Company also sub-leases space for its Clinical Services operations on a
month-to-month basis for $1,075 per month.
The
Company leases a copier for $216 per month which it accounts for as a capital
lease with an interest rate of 9% per year. The lease terminates in February
2013 at which time the copier can be purchased at fair value.
F-18
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Future
Minimum Lease Payment and Debt Maturities
At
September 30, 2009, the estimated future minimum lease payment under
non-cancelable operating and capital leases and debt maturities were as
follows:
Year ending September 30,
|
Operating
Leases
|
Capital
Lease
|
Debt
Maturities
|
Total
|
||||||||||||
2010
|
36,000
|
2,600
|
100,000
|
138,600
|
||||||||||||
2011
|
-
|
2,600
|
25,000
|
27,600
|
||||||||||||
2012
|
-
|
2,600
|
2,600
|
|||||||||||||
2013
|
-
|
1,100
|
1,100
|
|||||||||||||
Total
|
$
|
36,000
|
$
|
8,900
|
$
|
125,000
|
$
|
169,900
|
||||||||
Less
interest
|
(700
|
)
|
(1,200
|
)
|
(6,400
|
)
|
(8,300
|
)
|
||||||||
Net
present value
|
35,300
|
7,700
|
118,600
|
161,600
|
||||||||||||
Less
current portion
|
(35,300
|
)
|
(2,100
|
)
|
(93,800
|
)
|
(131,200
|
)
|
||||||||
Long-term
debt and lease obligation
|
$
|
-
|
$
|
5,600
|
$
|
24,800
|
$
|
30,400
|
11.
|
SIGNIFICANT
CUSTOMERS
|
For the
year ended September 30, 2009, three customers accounted for 39% of Laboratory
Information Services revenue and 45% of accounts receivable at September 30,
2009.
For the
year ended September 30, 2008, two customers accounted for 29% of Laboratory
Information Services revenue and 24% of accounts receivable at September 30,
2008.
12.
|
SUBSEQUENT
EVENTS
|
The
following key events occurred after the end of the fiscal year dated September
30, 2009:
Results
of Clinical Trial Announced
On
November 2, 2009, the Company reported the results of its landmark study
presented by Charles DeBattista, D.M.H, M.D., at the U.S. Psychiatric and Mental
Health Congress. The poster presentation, titled Referenced-EEG®
(rEEG) Efficacy Compared to STAR*D For Patients With Depression Treatment
Failure: First Look At Final Results, highlighted a dramatic
improvement in personalized medicine technology for use in treatment of patients
with depression. In this study, rEEG proved effective at predicting
medication response for treatment-resistant patients approximately
65 percent of the time.
The study
included 114 patients in 12 medical centers, including Harvard,
Stanford, Cornell, UCI and Rush. The 12-week study found that rEEG
significantly outperformed the modified STAR*D treatment
algorithm. The difference, or separation, between rEEG and the
control group was 50 and 100 percent for the study’s two primary
endpoints. Typically, separation between a new treatment and a
control group is less than 10 percent in antidepressant
studies.
The
study, the largest in the Company’s history, was a randomized, blinded,
controlled, parallel group, multicenter study. The patients in the
study experienced depression treatment failure of one or more SSRIs and/or had
failure with at least two classes of antidepressants. The patients
fell into two groups: 1) those treated with rEEG medication
guidance, and 2) those treated with the modified STAR*D treatment
algorithm.
F-19
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Ruling from Delaware Chancery Court
in Relation to Company’s Litigation with Leonard Brandt
On
December 2, 2009, the Delaware Chancery Court dismissed complaints brought
against the Company by Brandt. At the conclusion of a two-day
trial that commenced December 1, the Chancery Court entered judgment
for the Company and dismissed with prejudice Brandt's action brought pursuant to
Section 225 of the Delaware General Corporation Law. The Chancery Court
thereby found that the purported special meeting of stockholders convened by
Brandt on September 4, 2009 was not valid and that the directors purportedly
elected at that meeting will not be seated. On January 4, 2010,
Brandt filed an appeal with the Supreme Court of the State of Delaware in
relation to the case, which the Company believes is without merit and intends to
vigourously defend. For a full description of the events associated
with the Brandt Litigation please refer to the heading “Legal Proceedings” on
page 48 of this prospectus.
Completion
of Second Closing of Private Placement Transaction
On
December 24, 2009, the Company completed a second closing of its private
placement (the first closing having occurred on August 26, 2009), resulting in
additional gross proceeds to the Company of approximately $3.0 million from
accredited investors.
Pursuant
to Subscription Agreements entered into with the investors, the Company sold
approximately 55 Investment Units at $54,000 per Investment Unit. Each
“Investment Unit” consists of 180,000 shares of the Company’s common stock and a
five year non-callable warrant to purchase 90,000 shares of the Company’s common
stock at an exercise price of $0.30 per share.
After
commissions and expenses, the Company received net proceeds of approximately
$2.65 million at the second closing. The Company intends to use the
proceeds from the second closing of its private placement for general corporate
purposes, including clinical trial expenses, research and development expenses,
and general and administrative expenses, including the payment of accrued legal
expenses incurred in connection with the Company’s litigation with Leonard
Brandt.
A FINRA
member firm acted as lead placement agent (the “Placement Agent”) in connection
with the second closing of the private placement. For its services in
connection with the second closing, the Placement Agent received (i) a cash fee
of $195,200, (ii) a cash expense allowance of $59,920, and (iii) a five year
non-callable warrant to purchase 672,267 shares of the Company’s common
stock at an exercise price of $ 0.33 per share, first exercisable no earlier
than June 24, 2010.
In
connection with the second closing of the Company’s private placement, each
investor who participated in the financing became party to the Registration
Rights agreement described above under Note 2 and will receive the same rights
and benefits as the investors in the first closing of the Company’s Private
Placement on August 26, 2009.
Completion
of Third and Fourth Closings of Private Placement Transcation
The
Company completed a third and fourth closing of its private placement, on
December 31, 2009 and January 4, 2010, respectively, resulting in gross proceeds
to the Company of approximately $540,000, thereby completing its Private
Placement.
Pursuant
to Subscription Agreements entered into with the investors, the Company sold 10
Investment Units at $54,000 per Investment Unit. Each “Investment Unit” consists
of 180,000 shares of the Company’s common stock and a five year non-callable
warrant to purchase 90,000 shares of the Company’s common stock at an exercise
price of $0.30 per share.
After
commissions and expenses, the Company received net proceeds of approximately
$480,000 in the Private Placement. The Company intends to use the net
proceeds from the Private Placement for general corporate purposes, including
clinical trial expenses, research and development expenses, and general and
administrative expenses, including the payment of accrued legal expenses
incurred in connection with the Company’s litigation with Leonard
Brandt.
F-20
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
A FINRA
member firm acted as lead placement agent (the “Placement Agent”) in connection
with the Private Placement. For its services in connection with the
December 31, 2009 closing of the Private Placement, the Placement Agent received
(i) a cash fee of $4,320, (ii) a cash expense allowance of $8,640, and (iii) a
five year non-callable warrant to purchase 14,400 shares of the Company’s common
stock at an exercise price of $.33 per share.
For its
services in connection with the January 4, 2010 closing of the Private
Placement, the lead Placement Agent received (i) a cash fee of $1,080, (ii) a
cash expense allowance of $2,160, and (iii) a five year non-callable warrant to
purchase 3,600 shares of the Company’s common stock at an exercise price of $.33
per share.
In
connection with the third and fourth closings of the Company’s Private
Placement, each investor who participated in the financing became party to the
Registration Rights agreement described above under Note 2 and will receive the
same rights and benefits as the investors in the earlier closings of the
Company’s Private Placement.
Receipt
of letter from Food and Drug Administration
On
December 28, 2009, the Company's regulatory counsel received a letter (“the
Letter”) from the FDA in response to its prior correspondence relating to the
possible classification of the Company's rEEG, as a medical device. The Company
will continue its ongoing dialogue with the FDA regarding its rEEG (which may be
subject to pre-market review). If pre-market review is required the Company’s
revenue could be negatively impacted until such review is completed and
clearance to market or approval is obtained. The Letter does not have any impact
on the consolidated financial statements as of and for the years ended September
30, 2009 and 2008. See "Government Regulation" section for detailed
discussion.
F-21
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. Other Expenses of Issuance and Distribution.
The
Registrant will bear all expenses of registration incurred in connection with
this offering. The selling shareholders whose shares are being registered will
bear all selling and other expenses. The following table itemizes the expenses
incurred by the Registrant in connection with the offering. All the amounts
shown are estimates except the Securities and Exchange Commission registration
fee.
Amount
|
||||
Registration
fee – Securities and Exchange Commission
|
$ | 2,422 | ||
Legal
fees and expenses
|
$ | 25,000 | ||
Accounting
fees and expenses
|
$ | 15,000 | ||
Miscellaneous
expenses
|
$ | 5,000 | ||
Total
|
$ | 47,422 |
ITEM
14. Indemnification of Directors and Officers.
The
Delaware General Corporation Law and certain provisions of our certificate of
incorporation an bylaws under certain circumstances provide for indemnification
of our officers, directors and controlling persons against liabilities which
they may incur in such capacities. A summary of the circumstances in which such
indemnification is provided for is contained herein, but this description is
qualified in its entirety by reference to our certificate of incorporation,
bylaws and to the statutory provisions.
In
general, any officer, director, employee or agent may be indemnified against
expenses, fines, settlements or judgments arising in connection with a legal
proceeding to which such person is a party, if that person’s actions were in
good faith, were believed to be in our best interest, and with respect to any
criminal action or proceeding, such person had no reasonable cause to believe
their actions were unlawful. Unless such person is successful upon the merits in
such an action, indemnification may be awarded only after a determination by
independent decision of the board of directors, by legal counsel, or by a vote
of the stockholders, that the applicable standard of conduct was met by the
person to be indemnified.
The
circumstances under which indemnification is granted in connection with an
action brought on our behalf is generally the same as those set forth above;
however, with respect to such actions, indemnification is granted only with
respect to expenses actually incurred in connection with the defense or
settlement of the action. In such actions, unless the court determines
otherwise, the person to be indemnified must have acted in good faith and in a
manner believed to have been in our best interest, and have not been adjudged
liable to the corporation.
Indemnification
may also be granted pursuant to the terms of agreements which we are currently
party to with each of our directors and executive officers, agreements which we
may enter into in the future or pursuant to a vote of stockholders or directors.
Delaware law and our certificate of incorporation also grant the power to us to
purchase and maintain insurance which protects our officers and directors
against any liabilities incurred in connection with their service in such a
position, and such a policy may be obtained by us.
II-1
A
stockholder’s investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present we are reimbursing SAIL Venture
Partners, LLP, $107,600 and Equity Dynamics, Inc $55,200 for their costs
incurred in defending Mr. Jones and Mr. Pappajohn and their respective
organizations in the course of the Brandt Litigation. Apart from our
litigation with Brandt, there is no pending litigation or proceeding
involving any of our directors, officers or employees regarding which
indemnification by us is sought, nor are we aware of any threatened litigation
that may result in claims for indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
Reference
is made to the following documents filed as exhibits to this Registration
Statement regarding relevant indemnification provisions described above and
elsewhere herein:
Exhibit
|
Number
|
Certificate
of Incorporation of Registrant, as amended
|
3.1.1
|
Bylaws
of Registrant
|
3.2
|
Form
of Indemnification Agreement
|
10.22
|
ITEM
15. Recent Sales of Unregistered Securities.
Reference
is made to the Stock Purchase Agreement entered into on July 18, 2006, and the
Shares for Debt Agreement entered into on January 11, 2007 described above in
the section entitled Certain Relationships and Related Transaction, which is
hereby incorporated by reference.
Merger
with CNS California
On
January 16, 2007, we entered into an Agreement and Plan of Merger with CNS
Response, Inc., a California corporation (or CNS California), and CNS Merger
Corporation, a California corporation and our wholly-owned subsidiary that was
formed to facilitate the acquisition of CNS California. On March 7,
2007, the merger with CNS California closed, CNS California became our
wholly-owned subsidiary, and we changed our name from Strativation, Inc. to CNS
Response, Inc. At the Effective Time of the Merger (as defined in the
Merger Agreement, as amended on February 23, 2007), MergerCo was merged with and
into CNS California, the separate existence of MergerCo ceased, and CNS
California continued as the surviving corporation at the subsidiary
level. We issued an aggregate of 17,744,625 shares of our common
stock to the stockholders of CNS California in exchange for 100% ownership of
CNS California. Additionally, we assumed an aggregate of 8,407,517
options to purchase shares of common stock and warrants to purchase shares of
common stock on the same terms and conditions as previously issued by CNS
California.
Securities
Issued in 2007 Private Placement
On March
7, 2007, simultaneous with the closing of the Merger, we received gross proceeds
of approximately $7,008,450 in the first closing of a private placement
transaction (the “Private Placement”) with institutional investors and other
high net worth individuals (“Investors”). Pursuant to Subscription
Agreements entered into with these Investors, we sold 5,840,368 Investment
Units, at $1.20 per Investment Unit. Each “Investment Unit” consists of one
share of our common stock, and a five year non-callable warrant to purchase
three-tenths of one share of our common Stock, at an exercise price of $1.80 per
share (the “Investor Warrant”). On May 16, 2007, we completed a
second closing of the Private Placement for an additional 664,390 Investment
Units. The additional gross proceeds to us amounted to
$797,300.
II-2
Brean
Murray Carret & Co. (“Brean Murray”) acted as placement agent and corporate
finance advisor in connection with the Private Placement. For their services as
placement agent and financial advisor, pursuant to the terms of an Engagement
Agreement between CNS California and Brean Murray, Brean Murray received a
retainer in the form of 83,333 shares of our common stock (having a deemed value
of $100,000) upon the closing of the Private Placement. We also paid
Brean Murray a fee equal to 8% of the funds raised in the Private Placement, or
approximately $624,500 of the gross proceeds from the financing. In
addition, Brean Murray received warrants (the “Placement Agent Warrants”) to
purchase shares of our common stock in amounts equal to (i) 8% of the shares of
common stock sold by Brean Murray in the Private Placement (520,381 warrants at
an exercise price of $1.44 per share), and (ii) 8% of the shares underlying the
Investor Warrants sold by Brean Murray in the Private Placement (156,114
warrants at an exercise price of $1.80 per share). The Placement
Agent Warrants are fully vested and have a term of 5 years. We also
paid $87,700 in costs, fees and expenses incurred by Brean Murray in connection
with the Private Placement. We expressly assumed CNS California’s
agreement with Brean Murray upon the closing of the Merger. Pursuant
to this agreement, Brean Murray had a right of first refusal to represent us in
certain corporate finance transactions for a period of one year following the
closing of the Private Placement. After payment of commissions and
expenses associated with the offering, we received net proceeds of approximately
$6.9 million in the private placement financing.
In
connection with the above stock issuances, except as otherwise disclosed we did
not pay any underwriting discounts or commissions. None of the sales of
securities described or referred to above was registered under the Securities
Act of 1933, as amended (the “Securities Act”). Each of the purchasers fell into
one or more of the categories that follow: one of our existing shareholders, one
of our creditors, one of our current or former officers or directors, one of our
employees, one of our service providers, or an accredited investor with whom we
or one of our affiliates had a prior business relationship. As a result, no
general solicitation or advertising was used in connection with the sales. In
making the sales without registration under the Securities Act, the company
relied upon one or more of the exemptions from registration contained in
Sections 4(2) of the Securities Act, and in Regulation D promulgated under the
Securities Act.
Securities
Issued in 2009-2010 Private Placement
First
Tranche: August 26, 2009
On August
26, 2009, we received gross proceeds of approximately $2,000,000 in the first
closing of our private placement transaction from six accredited
investors. Pursuant to Subscription Agreements entered into with the
investors, we sold approximately 38 Investment Units at $54,000 per Investment
Unit. Each “Investment Unit” consists of 180,000 shares of our Common
Stock and a five year non-callable warrant to purchase 90,000 shares of our
Common Stock at an exercise price of $0.30 per share. After
commissions and expenses, we received net proceeds of approximately $1,792,300
in the Private Placement. These funds were used to repay outstanding
liabilities, fund the clinical trial and for working capital. A FINRA
member firm acted as lead placement agent (the “Placement Agent”) in connection
with the Private Placement. For its services in connection with the
Private Placement, the Placement Agent received (i) a cash fee of $55,980, (ii)
a cash expense allowance of $40,860, and (iii) a five year non-callable warrant
to purchase 274,867 shares of our Common Stock at an exercise price of $0.33 per
share, first exercisable no earlier than February 26, 2010.
Pursuant
to a Registration Rights Agreement entered into with each investor, we agreed to
file a registration statement covering the resale of the Common Stock and the
Common Stock underlying the warrants sold in the private placement, as well as
the Common Stock underlying the warrants issued to the Placement Agent by the
later of October 26, 2009 or the 20th calendar day after the termination of the
offering. The Registration Rights agreement was subsequently amended
to allow the filing of the registration statement by the later of 10 business
days following the Company’s filing of its Annual Report on Form 10-K for its
September 30, 2009 year end or the 20 th
calendar day after termination of the offering.
II-3
In
addition, the Company agreed to use its best efforts to have the registration
statement declared effective no later than 180 days following the final closing
of the offering and maintain such effectiveness until the earlier of the second
anniversary of the date of such effectiveness or the date that all of the
securities covered by the registration statement may be sold without
restriction.
In
issuing the shares and warrants to the investors without registration under the
Securities Act of 1933, as amended (the “Securities Act”), we relied upon one or
more of the exemptions from registration contained in Sections 4(2) of the
Securities Act, and in Regulation D promulgated thereunder, as the shares and
warrants were issued to accredited investors, without a view to distribution,
and were not issued through any general solicitation or advertisement. We made
this determination based on the representations of each investor which included,
in pertinent part, that such investor is an “accredited investor” within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act, that
such investor was acquiring the shares and the warrant for investment purposes
for its own account, and not with a view to, or for resale in connection with,
any distribution or public offering thereof within the meaning of the Securities
Act, and that such investor understood that the shares, the warrant and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
Events
Relating to First Closing of Private Placement Transaction
(a) Conversion
of March Notes
On March
30, 2009, we entered into two Senior Secured Convertible Promissory Notes, each
in the principal amount of $250,000 (each a “March Note” and, collectively, the
“March Notes”), with Brandt Ventures, GP (“Brandt”) and SAIL Venture Partners,
LP (“SAIL”). Leonard Brandt, a former member of our board of directors, is the
general partner of Brandt and David B. Jones, a current member of our board of
directors, is a managing member of Sail Venture Partners, LLC, which is the
general partner of SAIL. The terms of the March Notes provided that in the event
we consummate an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), then the principal and all accrued,
but unpaid interest outstanding under the notes shall be automatically converted
into the securities issued in the equity financing by dividing such amount by
90% of the per share price paid by the investors in such
financing. In accordance with the terms of the March Notes, at the
first closing of the private placement, we issued to each of Brandt and SAIL
956,164 shares of common stock and a five year non-callable warrant to
purchase 478,082 shares of our common stock at an exercise price of $0.30 per
share.
(b) Conversion
of May SAIL Note
On May
14, 2009, we entered into a Bridge Note and Warrant Purchase Agreement (the
“SAIL Purchase Agreement”) with SAIL. Pursuant to the SAIL Purchase Agreement,
on May 14, 2009 SAIL purchased a Secured Promissory Note in the principal amount
of $200,000 from us (the “May SAIL Note”). In order to induce SAIL to purchase
the note, we issued to SAIL a warrant to purchase up to 100,000 shares of our
common stock at a purchase price equal to $0.25 per share. The
warrant expires on the earlier to occur of May 31, 2016 or a change of control
of the company. The terms of the May SAIL Note provided that in the
event we consummate an equity financing transaction of at least $1,500,000
(excluding any and all other debt that is converted), then the principal and all
accrued, but unpaid interest outstanding under the note shall be automatically
converted into the securities issued in the equity financing by dividing such
amount by 85% of the per share price paid by the investors in such
financing. In accordance with the terms of the May SAIL Note, at the
first closing of the private placement, we issued to SAIL 802,192 shares of our
common stock and a five year non-callable warrant to purchase 401,096 shares of
our common stock at an exercise price of $0.30 per share.
II-4
(c) Conversion
of Pappajohn Note
On June
12, 2009, Mr. Pappajohn entered into a Bridge Note and Warrant Purchase
Agreement (the “Pappajohn Purchase Agreement”) with us. Pursuant to
the Pappajohn Purchase Agreement, Mr. Pappajohn purchased a Secured Convertible
Promissory Note in the principal amount of $1,000,000 from us. In
order to induce Mr. Pappajohn to purchase the note, we issued to Mr.
Pappajohn a warrant to purchase up to 3,333,333 shares of our common stock at a
purchase price equal to $0.30 per share. The warrant expires on June
30, 2016.
The note
issued pursuant to the Pappajohn Purchase Agreement provided that the principal
amount of $1,000,000 together with a single payment of $90,000 (the “Premium
Payment”) would be due and payable, unless sooner converted into shares of our
common stock (as described below), upon the earlier to occur of: (i) a
declaration by Mr. Pappajohn on or after June 30, 2010 or (ii) an Event of
Default (as defined in the note). The note was secured by a lien on
substantially all of our assets (including all of our intellectual
property). In the event of a liquidation, dissolution or winding up
of the company, unless Mr. Pappajohn informed us otherwise, we were required to
pay Mr. Pappajohn an amount equal to the product of 250% multiplied by the then
outstanding principal amount of the note and the Premium Payment.
The
Pappajohn Purchase Agreement also provided that in the event we consummated an
equity financing transaction of at least $1,500,000 (excluding any and all other
debt that is converted), the then outstanding principal amount of the note (but
excluding the Premium Payment, which would be repaid in cash at the time of such
equity financing) would be automatically converted into the securities issued in
the equity financing by dividing such amount by the per share price paid by the
investors in such financing. The note also provided that the
securities issued upon conversion of the note would be otherwise issued on the
same terms as such shares are issued to the lead investor that purchases shares
of the company in the qualified financing.
At the
first closing of the private placement, we paid the Premium Payment to Mr.
Pappajohn, and the outstanding principal amount of Mr. Pappajohn’s note
($1,000,000 as of August 26, 2009) converted into 3,333,334 shares of our common
stock. In addition, in accordance with the terms of his note, Mr. Pappajohn was
issued a five year non-callable warrant to purchase 1,666,667 shares of our
common stock at an exercise price of $0.30 per share.
In
issuing the shares and warrants described above without registration under the
Securities Act, we relied upon one or more of the exemptions from registration
contained in Sections 4(2) of the Securities Act, and in Regulation D
promulgated thereunder, as such shares and warrants were issued to accredited
investors, without a view to distribution, and were not issued through any
general solicitation or advertisement. We made this determination based on the
representations of each note holder which included, in pertinent part, that such
note holder is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such note holder was
acquiring the shares and warrants for investment purposes for its own account,
and not with a view to, or for resale in connection with, any distribution or
public offering thereof within the meaning of the Securities Act, and that such
note holder understood that the shares, the warrants and the securities issuable
upon exercise thereof may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption
therefrom.
II-5
Second
Tranche: December 24, 2009
On
December 24, 2009, we completed a second closing of our private placement (as
described above, the first closing of our private placement occurred on August
26, 2009), resulting in additional gross proceeds to us of approximately $3.0
million.
Pursuant
to Subscription Agreements entered into with investors, we sold approximately 55
Investment Units at $54,000 per Investment Unit. Each “Investment Unit” consists
of 180,000 shares of our common stock and a five year non-callable warrant to
purchase 90,000 shares of our common stock at an exercise price of $0.30 per
share.
After
commissions and expenses, we received net proceeds of approximately $2.65
million in connection with the second closing of our private
placement. We intend to use the proceeds from the second closing for
general corporate purposes, including clinical trial expenses, research and
development expenses, and general and administrative expenses, including the
payment of accrued legal expenses incurred in connection with successfully
defending the company from actions brought in the Delaware Court of Chancery by
Leonard Brandt.
A FINRA
member firm acted as lead placement agent in connection with the second closing
of our private placement. For its services in connection with the
second closing, the Placement Agent received (i) a cash fee of $195,200, (ii) a
cash expense allowance of $59,920, and (iii) a five year non-callable warrant to
purchase 672,267 shares of our common stock at an exercise price of $ 0.33 per
share, first exercisable no earlier than June 24, 2010.
In
connection with the second closing of our private placement, each investor who
participated in the financing became party to the Registration Rights agreement
described above and will receive the same rights and benefits as the investors
in the first closing of our private placement.
In
issuing the shares and warrants to the investors without registration under the
Securities Act of 1933, as amended (the “Securities Act”), we relied upon one or
more of the exemptions from registration contained in Sections 4(2) of the
Securities Act, and in Regulation D promulgated thereunder, as the shares and
warrants were issued to accredited investors, without a view to distribution,
and were not issued through any general solicitation or
advertisement. We made this determination based on the
representations of each investor which included, in pertinent part, that such
investor is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such investor was
acquiring the shares and the warrant for investment purposes for its own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, and that such investor understood that the shares, the warrant and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
Third
and Fourth Tranches: December 31, 2009 and January 4,
2010
The
Company completed a third and fourth closing of its private placement, on
December 31, 2009 and January 4, 2010, respectively, resulting in gross proceeds
to the Company of approximately $540,000, thereby completing our private
placement.
Pursuant
to Subscription Agreements entered into with the investors, the Company sold 10
Investment Units at $54,000 per Investment Unit. Each “Investment Unit” consists
of 180,000 shares of the Company’s common stock and a five year non-callable
warrant to purchase 90,000 shares of the Company’s common stock at an exercise
price of $0.30 per share.
II-6
After
commissions and expenses, the Company received net proceeds of approximately
$480,000 in the third and fourth closings of the private
placement. The Company intends to use the net proceeds from the
Private Placement for general corporate purposes, including clinical trial
expenses, research and development expenses, and general and administrative
expenses, including payment of accrued legal expenses incurred in connection
with successfully defending the Company from actions brought in the Delaware
Court of Chancery by the Company’s former CEO, Leonard Brandt.
A FINRA
member firm acted as lead placement agent (the “Placement Agent”) in connection
with the private placement. For its services in connection with the
December 31, 2009 closing of the private placement, the Placement Agent received
(i) a cash fee of $4,320, (ii) a cash expense allowance of $8,640, and (iii) a
five year non-callable warrant to purchase 14,400 shares of the Company’s common
stock at an exercise price of $.33 per share.
For its
services in connection with the January 4, 2010 closing of the private
placement, the lead Placement Agent received (i) a cash fee of $1,080, (ii) a
cash expense allowance of $2,160, and (iii) a five year non-callable warrant to
purchase 3,600 shares of the Company’s common stock at an exercise price of $.33
per share.
In
connection with the third and fourth closings of our private placement, each
investor who participated in the financing became party to the Registration
Rights agreement described above and will receive the same rights and benefits
as the investors in the earlier closings of our private placement.
In
issuing the shares and warrants to the investors without registration under the
Securities Act of 1933, as amended (the “Securities Act”), the Company relied
upon one or more of the exemptions from registration contained in Sections 4(2)
of the Securities Act, and in Regulation D promulgated thereunder, as the shares
and warrants were issued to accredited investors, without a view to
distribution, and were not issued through any general solicitation or
advertisement. The Company made this determination based on the
representations of each investor which included, in pertinent part, that such
investor is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such investor was
acquiring the shares and the warrant for investment purposes for its own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, and that such investor understood that the shares, the warrant and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
II-7
ITEM
16. Exhibits and Financial Statement Schedules.
(a) The
following exhibits are filed herewith:
Exhibit
Number
|
Exhibit
Title
|
|
2.1
|
Agreement
and Plan of Merger between Strativation, Inc., CNS Merger Corporation and
CNS Response, Inc. dated as of January 16, 2007. Incorporated
by reference to Exhibit No. 10.1 to the Registrant’s Current Report on
Form 8-K (File No. 000-26285) filed with the Commission on January 22,
2007.
|
|
2.2
|
Amendment
No. 1 to Agreement and Plan of Merger by and among Strativation, Inc., CNS
Merger Corporation, and CNS Response, Inc. dated as of February 28,
2007. Incorporated by reference to Exhibit No. 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 1, 2007.
|
|
3.1.1
|
Certificate
of Incorporation, dated March 17, 1987. Incorporated by
reference to Exhibit No. 3(i) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7, 1999.
|
|
3.1.2
|
Certificate
of Amendment of Certificate of Incorporation, dated June 1, 2004.
Incorporated by reference to Exhibit 16 to the Registrant’s Current Report
on Form 8-K (File No. 000-26285) filed with the Commission on June 8,
2004.
|
|
3.1.3
|
Certificate
of Amendment of Certificate of Incorporation, dated August 2, 2004.
Incorporated by reference to Exhibit 16 to the Registrant’s Current Report
on Form 8-K (File No. 000-26285) filed with the Commission on August 5,
2004.
|
|
3.1.4
|
Certificate
of Amendment of Certificate of Incorporation, dated September 7,
2005. Incorporated by reference to Exhibit 4.4 to the
Registrant’s Registration Statement on Form S-8 (File No. 333-150398)
filed with the Commission on April 23, 2008.
|
|
3.1.5
|
Certificate
of Ownership and Merger Merging CNS Response, Inc., a Delaware
corporation, with and into Strativation, Inc., a Delaware corporation,
dated March 7, 2007. Incorporated by reference to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed
with the Commission on March 13, 2007.
|
|
3.2.1
|
Bylaws. Incorporated
by reference to Exhibit No. 3(ii) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7, 1999.
|
|
3.2.2
|
Amendment
No. 1 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 2, 2009.
|
|
3.2.3
|
Amendment
No. 2 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 23, 2009.
|
|
4.1
|
2006
CNS Response, Inc. Option Plan. Incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 10-QSB (File No.
000-26285) filed with the Commission on May 15, 2007.*
|
|
5.1
|
Opinion
of Stubbs, Alderton & Markiles, LLP
|
|
10.1
|
Amended
and Restated Registration Rights Agreement, dated January 16, 2007 by and
among the Registrant and the stockholders signatory thereto. Incorporated
by reference to Exhibit No. 10.2 to the Registrant’s Current Report on
Form 8-K (File No. 000-26285) filed with the Commission on January 16,
2007.
|
|
10.2
|
Form
of Subscription Agreement between the Registrant and certain investors,
dated March 7, 2007. Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
10.3
|
Form
of Indemnification Agreement by and among the Registrant, CNS Response,
Inc., a California corporation, and certain individuals, dated March 7,
2007. Incorporated by reference to Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K (File No. 000-26285) filed with the Commission
on March 13, 2007.
|
|
10.4
|
Form
of Registration Rights Agreement by and among the Registrant and certain
Investors signatory thereto dated March 7, 2007. Incorporated by reference
to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on March 13, 2007.
|
|
10.5
|
Form
of Registration Rights Agreement by and among the Registrant and certain
stockholders of the Company signatory thereto dated March 7,
2007. Incorporated by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
II-8
10.6
|
Employment
Agreement by and between the Registrant and George Carpenter dated October
1, 2007. Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on October 3, 2007.*
|
|
10.7
|
Employment
Agreement by and between the Registrant and Daniel Hoffman dated January
11, 2008. Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K (File No. 000-26285) filed with the Commission
on January 17, 2008.*
|
|
10.8
|
Stock
Purchase Agreement by and among Colorado CNS Response, Inc.,
Neuro-Therapy, P.C. and Daniel A. Hoffman, M.D. dated January 11,
2008. Incorporated by reference to the Registrant’s Annual
Report on Form 10-K (File No. 000-26285) filed with the Commission on
January 13, 2009.
|
|
10.9
|
Form
of Warrant issued to Investors in Private
Placement. Incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
10.10
|
Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and Brandt Ventures, GP. Incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No.
000-26285) filed with the Commission on April 3, 2009.
|
|
10.11
|
Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K
(File No. 000-26285) filed with the Commission on April 3
2009.
|
|
10.12
|
Bridge
Note and Warrant Purchase Agreement, dated May 14, 2009 by and between the
Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on May 20, 2009.
|
|
10.13
|
Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on May 20, 2009.
|
|
10.14
|
Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on May
20, 2009.
|
|
10.15
|
Bridge
Note and Warrant Purchase Agreement, dated June 12, 2009, by and between
the Company and John Pappajohn. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June
18, 2009.
|
10.16
|
Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on June 18, 2009.
|
|
10.17
|
Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June
18, 2009.
|
|
10.18
|
Form
of Subscription Agreement. Incorporated by reference to Exhibit
10.18 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on
December 30, 2009.
|
|
10.19
|
Form
of Warrant. Incorporated by reference to Exhibit 10.19 to the
Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed
with the Securities and Exchange Commission on December 30,
2009.
|
|
10.20
|
Registration
Rights Agreement. Incorporated by reference to Exhibit 10.20 to
the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on
December 30, 2009.
|
|
10.21
|
Amendment
No. 1 to Registration Rights Agreement. Incorporated by
reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on December 30, 2009.
|
|
10.22
|
Form
of Indemnification Agreement. Incorporated by reference to
Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on
December 30, 2009.
|
|
21.1
|
Subsidiaries
of the Registrant. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with
the Commission on January 13, 2009.
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
23.2
|
Consent
of Stubbs, Alderton & Markiles, LLC (included in Exhibit
5.1)
|
|
24.1
|
Power
of Attorney (included as part of the Signature
Page).
|
*
Indicates a management contract or compensatory plan.
II-9
(b) Financial
Statement Schedules
Schedules
not listed above have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
II-10
ITEM
17. Undertakings.
(a) Rule 415
Offering. The undersigned registrant hereby
undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Actof
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(5)(ii) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
II-11
(h) Request for Acceleration of
Effective Date or filing of registration statement becoming effective upon
filing..
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-12
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Costa Mesa, State of
California, on January 29,
2010.
CNS
RESPONSE, INC.
|
|
(Registrant)
|
|
By:
|
/s/ George Carpenter |
George
Carpenter
|
|
Chief
Executive Officer and Secretary
|
|
(Principal
Executive Officer and Principal Financial and Accounting
Officer)
|
POWER OF
ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints George Carpenter and Paul Buck, and each
of them, his or her true and lawful attorneys-in-fact and agents with full power
of substitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by the Registration Statement that is to
be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and to file the same,
with all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his, her or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
stated.
Signature
|
Title
|
Date
|
||
/s/ George
Carpenter
|
Chief
Executive Officer and Secretary, and Chairman of the Board
|
January 29, 2010
|
||
George
Carpenter
|
(Principal
Executive Officer and Principal Financial and Accounting
Officer)
|
|||
/s/ David
B. Jones
|
Director
|
January 29, 2010
|
||
David
B. Jones
|
||||
/s/
Jerome Vaccaro
|
Director
|
January 29, 2010
|
||
Jerome
Vaccaro, M.D.
|
||||
/s/
Henry T. Harbin
|
Director
|
January 29, 2010
|
||
Henry
T. Harbin, M.D.
|
||||
/s/
John Pappajohn
|
Director
|
January 29, 2010
|
||
John
Pappajohn
|
||||
/s/
Tommy Thompson
|
Director
|
January 29, 2010
|
||
Tommy
Thompson
|
S-1
EXHIBIT
INDEX
Exhibit
Number
|
Exhibit
Title
|
|
2.1
|
Agreement
and Plan of Merger between Strativation, Inc., CNS Merger Corporation and
CNS Response, Inc. dated as of January 16, 2007. Incorporated
by reference to Exhibit No. 10.1 to the Registrant’s Current Report on
Form 8-K (File No. 000-26285) filed with the Commission on January 22,
2007.
|
|
2.2
|
Amendment
No. 1 to Agreement and Plan of Merger by and among Strativation, Inc., CNS
Merger Corporation, and CNS Response, Inc. dated as of February 28,
2007. Incorporated by reference to Exhibit No. 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 1, 2007.
|
|
3.1.1
|
Certificate
of Incorporation, dated March 17, 1987. Incorporated by
reference to Exhibit No. 3(i) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7, 1999.
|
|
3.1.2
|
Certificate
of Amendment of Certificate of Incorporation, dated June 1, 2004.
Incorporated by reference to Exhibit 16 to the Registrant’s Current Report
on Form 8-K (File No. 000-26285) filed with the Commission on June 8,
2004.
|
|
3.1.3
|
Certificate
of Amendment of Certificate of Incorporation, dated August 2, 2004.
Incorporated by reference to Exhibit 16 to the Registrant’s Current Report
on Form 8-K (File No. 000-26285) filed with the Commission on August 5,
2004.
|
|
3.1.4
|
Certificate
of Amendment of Certificate of Incorporation, dated September 7,
2005. Incorporated by reference to Exhibit 4.4 to the
Registrant’s Registration Statement on Form S-8 (File No. 333-150398)
filed with the Commission on April 23, 2008.
|
|
3.1.5
|
Certificate
of Ownership and Merger Merging CNS Response, Inc., a Delaware
corporation, with and into Strativation, Inc., a Delaware corporation,
dated March 7, 2007. Incorporated by reference to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed
with the Commission on March 13, 2007.
|
|
3.2.1
|
Bylaws. Incorporated
by reference to Exhibit No. 3(ii) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7, 1999.
|
|
3.2.2
|
Amendment
No. 1 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 2, 2009.
|
|
3.2.3
|
Amendment
No. 2 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 23, 2009.
|
|
4.1
|
2006
CNS Response, Inc. Option Plan. Incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 10-QSB (File No.
000-26285) filed with the Commission on May 15, 2007.*
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5.1
|
Opinion
of Stubbs, Alderton & Markiles, LLP
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10.1
|
Amended
and Restated Registration Rights Agreement, dated January 16, 2007 by and
among the Registrant and the stockholders signatory thereto. Incorporated
by reference to Exhibit No. 10.2 to the Registrant’s Current Report on
Form 8-K (File No. 000-26285) filed with the Commission on January 16,
2007.
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10.2
|
Form
of Subscription Agreement between the Registrant and certain investors,
dated March 7, 2007. Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
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10.3
|
Form
of Indemnification Agreement by and among the Registrant, CNS Response,
Inc., a California corporation, and certain individuals, dated March 7,
2007. Incorporated by reference to Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K (File No. 000-26285) filed with the Commission
on March 13, 2007.
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10.4
|
Form
of Registration Rights Agreement by and among the Registrant and certain
Investors signatory thereto dated March 7, 2007. Incorporated by reference
to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on March 13, 2007.
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10.5
|
Form
of Registration Rights Agreement by and among the Registrant and certain
stockholders of the Company signatory thereto dated March 7,
2007. Incorporated by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
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10.6
|
Employment
Agreement by and between the Registrant and George Carpenter dated October
1, 2007. Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on October 3,
2007.*
|
EX-1
10.7
|
Employment
Agreement by and between the Registrant and Daniel Hoffman dated January
11, 2008. Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K (File No. 000-26285) filed with the Commission
on January 17, 2008.*
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10.8
|
Stock
Purchase Agreement by and among Colorado CNS Response, Inc.,
Neuro-Therapy, P.C. and Daniel A. Hoffman, M.D. dated January 11,
2008. Incorporated by reference to the Registrant’s Annual
Report on Form 10-K (File No. 000-26285) filed with the Commission on
January 13, 2009.
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10.9
|
Form
of Warrant issued to Investors in Private
Placement. Incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
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10.10
|
Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and Brandt Ventures, GP. Incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No.
000-26285) filed with the Commission on April 3, 2009.
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10.11
|
Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K
(File No. 000-26285) filed with the Commission on April 3
2009.
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10.12
|
Bridge
Note and Warrant Purchase Agreement, dated May 14, 2009 by and between the
Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on May 20, 2009.
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10.13
|
Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on May 20, 2009.
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10.14
|
Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on May
20, 2009.
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10.15
|
Bridge
Note and Warrant Purchase Agreement, dated June 12, 2009, by and between
the Company and John Pappajohn. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June
18, 2009.
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10.16
|
Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on June 18, 2009.
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|
10.17
|
Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June
18, 2009.
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|
10.18
|
Form
of Subscription Agreement. Incorporated by reference to Exhibit
10.18 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on
December 30, 2009.
|
|
10.19
|
Form
of Warrant. Incorporated by reference to Exhibit 10.19 to the
Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed
with the Securities and Exchange Commission on December 30,
2009.
|
|
10.20
|
Registration
Rights Agreement. Incorporated by reference to Exhibit 10.20 to
the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on
December 30, 2009.
|
|
10.21
|
Amendment
No. 1 to Registration Rights Agreement. Incorporated by
reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K
(File Number 000-26285) filed with the Securities and Exchange
Commission on December 30, 2009.
|
|
10.22
|
Form
of Indemnification Agreement. Incorporated by reference to
Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on
December 30, 2009.
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|
21.1
|
Subsidiaries
of the Registrant. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with
the Commission on January 13, 2009.
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|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
23.2
|
Consent
of Stubbs, Alderton & Markiles, LLC (included in Exhibit
5.1)
|
|
24.1
|
Power
of Attorney (included as part of the Signature
Page).
|
*
Indicates a management contract or compensatory plan.
EX-2